The jobs report that enraged Trump was flashing a recession warning sign

CNN

7 days ago

The bad news in last Friday's jobs report may have been overshadowed when President Donald Trump fired the commissioner in charge of producing it. But economists haven't forgotten about America's job market – and they're growing concerned.
Some of the jobs report data has economists using a word they haven't uttered in several months: recession.
Hiring over the past three months slowed dramatically, creating problems for the economists and statisticians at the Bureau of Labor Statistics whose job is to make sense of the payroll data they get from thousands of businesses across the country. As new data came in about May and June's employment, the BLS was forced to sharply lower those months' job totals from their preliminary estimates.
The BLS revised May and June's jobs totals lower by a combined 258,000 jobs. That massive revision gave economists some serious agita. Larger revisions have happened before, but every time changes that large have taken place over the course of at least two months, the US economy has been in a recession – at least since records began in 1968.
'The job market is terrible,' said Douglas Holtz-Eakin, former director of the Congressional Budget Office during the George W. Bush administration. 'Outside of education and health, the economy has lost private sector jobs in the past three months. That's terrible.'
The US economy has added an average of just 85,000 jobs per month this year, which is well below the 177,000 jobs that the economy added on average each month before the pandemic.
Poor jobs data doesn't mean the US economy is in or going into a recession. Several recent economic indicators are pointing in the wrong direction – weakness in second-quarter gross domestic product and slower-than-expected growth in both the manufacturing and services sectors, for example. But, importantly, the National Bureau of Economic Research, which is responsible for declaring recessions, tracks four big indicators of economic activity – consumer spending, personal income, factory production and employment. None have been pointing to a recession or even that the US economy is on the precipice of a recession.
That is, until Friday's jobs report. Yet even the recession alarms it sounded come with some caveats. Recent moribund job growth was likely distorted by business uncertainty surrounding Trump's tariffs, and it's too early to tell whether it will rebound or continue to remain at this low level, noted Keith Lerner, co-chief investment officer at Truist.
'The US economy is in a muddle-through environment,' said Lerner, who said the Federal Reserve probably needs to take action to lower interest rates soon because the jobs report suggests it might be behind the curve.
The Fed has known about the slowing hiring for quite some time. But the sharp pullback over the past few months – data the Fed didn't have when it made its decision last week to hold interest rates steady – probably means the economy is considerably weaker than economists had expected.
'Friday's jobs report was terrible with recessionary level numbers, but slowing hiring is not new,' said Robert Ruggirello, chief investment officer, Brave Eagle Wealth Management. 'While Friday's report does not mean we are entering a recession, it shows that companies are freezing hiring and firing until there is more policy certainty and business confidence.'
Ironically, the leading culprit for slowing jobs growth may be the thing that has been holding the Fed back from cutting rates: Trump's tariffs. The Fed had been in wait-in-see mode in case tariffs pushed prices higher. The flip side is that the US economy appeared strong enough to handle higher interest rates.
But it seems businesses are no longer waiting. They're freezing hiring and changing their investments as they grow fearful that tariffs could raise costs and hurt the economy.
'The president's unorthodox economic agenda and policies may be starting to make a dent in the labor market,' said Chris Rupkey, chief economist at FwdBonds. 'Businesses are not waiting as they are cutting back on the numbers of new workers they bring on board, which means we can no longer count on the employment markets to be a positive factor supporting economic growth in the weeks and months ahead.'
Trump's immigration policy appears to be taking a toll, too. Since April, 1.4 million people dropped out of the US labor force – 802,000 of whom were foreign born.
That may have helped make the jobs report look slightly better than it actually is. Because of the way the survey was taken, if the 503,000 who dropped out of the labor force but still wanted to work had told the BLS that they were actively searching for a job, the unemployment rate would have risen to 4.5% last month, Rupkey said. Instead, it rose to 4.2%.
The revisions, though surprising for their sheer size, were not fully unexpected. They align with the other inputs that analysts have been tracking, Goldman Sachs economists said in a note to clients Saturday, and they help paint a clearer picture of the economy.
Other key jobs indicators 'have slowed significantly in recent months,' wrote Goldman Sachs economist Jan Hatzius. 'Taken together, the economic data confirm our view that the US economy is growing at a below-potential pace.'
In other words, Goldman Sachs isn't shocked by the revisions. If anything, they fit with the broader puzzle pieces.
The revisions were 'undeniably concerning,' Bank of America economists said in a note to investors Monday. But the 'silver lining' is that a considerable amount of the revisions had to do with seasonal adjustments – basically algorithms that needed adjusting as new data came in.
The BLS considers its initial jobs numbers to be preliminary when they're first published, because some respondents fail to report their payroll data by the BLS' deadline. Low survey responses can make the report more challenging to estimate. But the BLS continues to collect the payroll data as it's reported, and it revises the data accordingly.
To extrapolate the data for the entire country, BLS economists add in some educated guesswork, based on seasonal hiring trends. The BLS also smooths out the data with calculations known as seasonal adjustments to avoid huge spikes and dips in data each month.
The data are also revised because of those seasonal adjustments. If the more complete data comes in well above or below the preliminary data, revisions can be exacerbated by the BLS' seasonal adjustments, which sometimes need to be recalculated.
Now that the BLS has a better sense of the job market – one with a much slower pace of hiring – revisions in future months may be far less dramatic than over the past several.
CNN's Matt Egan contributed to this report.