Employment report July 2025

Tariffs and uncertainty paralyze employers

• July’s employment report was soft, with a modest 73,000 payroll gain, but the real shocker came from a significant 258,000 downward revision to job gains in May and June. With US employment rising only 19,000 and 14,000 in May and June, respectively, the three-month trailing average of payrolls has plunged to a paltry 35,000 — down from 123,000 last July. With persistent policy uncertainty, tariffs and diminished immigration flows paralyzing employers, the US economy is now flirting with job losses, revealing a labor market that is much weaker than most Fed policymakers had believed. The Fed is now behind the curve.
  
  
• The Establishment Survey detail was not reassuring, with only 51% of private subsectors adding jobs in July. Health care alone accounted for 100% of the headline payroll gain and 76% of the services employment gains. Leisure employment is now stagnant; professional and business services employment continues to decline, while finance and retail are posting modest gains. Construction employment is stagnant, and manufacturing payrolls are shrinking. At the government level, federal job cuts from the Department of Government Efficiency (DOGE) continue to reduce the federal workforce, while state and local government employment is moving sideways. 
  
  
• The Household Survey data wasn’t encouraging either, with the unemployment rate rising a tick to 4.2% despite the labor force participation rate falling a tick to 62.2% — its lowest since November 2022. Tighter immigration policies are increasingly restraining labor supply, with the number of employed falling by 260,000 and the number of unemployed rising by 221,000.
  
  
• As we have been stressing, several alternative labor market indicators underscore the labor market deceleration. The underemployment rate — reflecting marginally attached workers and those working part time for economic reasons — rose 0.2 percentage point (ppt) to 7.9%. The hiring rate is near its lowest level since 2013, job-cut announcements are up 75% year-to-date relative to 2024, and The Conference Board’s labor market differential rate — a measure of the difficulty of finding a job — is at its lowest since March 2021.
  
  
• Sadly, employment appears set for a further summer slowdown as firms, facing renewed cost volatility from escalating trade tensions, remain focused on managing labor costs through reduced hiring, performance-based layoffs, restrained wage growth and lower entry-level wages. We anticipate job creation will weaken further, remaining below trend in the coming months, with the unemployment rate likely rising toward 4.8% by early 2026.
  
   

In the details

Private sector employment rose by 83,000 jobs, while government payrolls fell by 10,000 as ongoing job losses at the federal government level (due to DOGE cuts) as well as reduced payrolls in state and local education were partially offset by non-education job gains at the state and local level.
 

Employment in goods-producing industries fell by 13,000 jobs while services employment increased by a moderate 96,000 jobs. More than three quarters of the job gains in services came from the health care sector (+73,000) while retail trade employment rebounded by 16,000 jobs following a loss of 29,000 jobs in the two prior months. The financial sector added 15,000 jobs while leisure and hospitality payrolls only rose 5,000. Professional and business services payrolls fell 14,000 with temporary services down 4,000. Wholesale trade employment lost 8,000 jobs while transportation and warehousing payrolls rose 4,000.
 

In the goods-producing sector, construction payrolls increased by only 2,000 — and has been essentially flat since April — while manufacturing payrolls post their third consecutive decline of more than 10,000, at -11,000. Tariffs, trade policy uncertainty and immigration constraints are having a notable effect on the goods sector with manufacturing employment down 37,000 since April.
 

On the household survey side, the unemployment rate rose 0.1ppt to 4.2% and the labor force shrunk — signaling the growing supply shock from immigration constraints. Household Survey employment fell 260,000 in July while the labor force participation rate fell 0.1ppt to 62.2% — its lowest since November 2022. The prime-age labor force participation rate (workers aged 25 to 54 years old) also fell 0.1ppt to 83.4% and is well below its cyclical peak of 83.9% reached in July–August 2024.
 

Stricter immigration policies will curb labor force flows in the coming quarters. Immigration flows to the US have already seen a significant decline, especially at the southern border. And the US administration has been canceling and declining to renew protections and work permits of individuals through programs such as the Temporary Protected Status, which could affect hundreds of thousands of workers. This will weigh on employment in key industries like agriculture, construction, hospitality and health care.
 

On the wage front, average hourly earnings rose 0.3% month over month, pushing wage growth up a tick to 3.9% year over year — but only because of an unfavorable comparison to a soft July 2024 print. While reduced labor supply could be seen as a potential catalyst for stronger wage growth, the fact is that labor demand has slowed materially, and bargaining power is now firmly on the employer side. With the cost of doing trade surging, cost-cutting efforts will dominate the wage narrative. We see wage growth trending toward 3.5% in H2.
 

Coincidence or not, Governor Christopher Waller appears vindicated, with the latest employment report likely to jolt many Fed policymakers out of a comfortably numb stance. Following weak GDP data in the first half of 2025, soft consumer spending momentum and a concerning labor market slowdown, many policymakers — including Fed Chair Jerome Powell — who had been on the fence about easing are now more likely to support a rate cut in September. In the context of growing internal debate within the Committee, this report strengthens the hand of those advocating for a data-driven pivot — particularly if, as Powell noted on Wednesday, the base case assumes that tariffs will result in a one-time price shock.