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May job growth was revised down by 125,000, and June, by 133,000: Stunning revisions that suggest the labor market slowdown has happened earlier than economists expected. Roughly half of the revision was to state and local government employment, especially in education. Adjusting for seasonal variation in education employment is always challenging, especially during the summer months. But downward revisions also hit retail, health care, leisure and hospitality, professional and business services, and financial activities, indicating that the private sector has also seen a more severe hiring slowdown than was initially apparent.
July’s job growth was a subdued but still moderate 73,000. Job growth had been expected to fall below 100,000 per month for a while, given slow population growth and the more cautious economic environment. The manufacturing sector is contracting again, cutting jobs for the third straight month. Job growth has almost stopped in the leisure and hospitality sector. Federal government jobs fell for the sixth month in a row. But retail added jobs in July after two poor months, and health care once again contributed its usual robust gains.
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Overall, the picture is of a weak labor market, with few sectors adding jobs outside of health care and social assistance. Even though the rise in the unemployment rate was small, edging up from 4.1% to 4.2%, the length of time workers are unemployed increased, and the number who were forced to work part-time because of poor economic conditions rose. The labor force declined for the third month in a row, likely as a result of the campaign to deport immigrants. Foreign-born worker employment dropped for the fourth straight month (the Bureau of Labor Statistics survey does not distinguish between legal and illegal immigrants). The decline in the labor force may be preventing the unemployment rate from rising more as hiring slows, since the jobless rate is calculated as a percentage of the labor force.
Wage growth ticked up again to a 3.9% annual pace. However, it is still expected to slow to 3.5% by the end of the year. Wage growth tends to lag other labor market indicators.
Consumer and business uncertainty about the economy will continue to delay hiring plans and should slow future pay gains. Hiring is often deferred when consumers are concerned about losing their jobs, or when businesses don’t know if there will be a positive return to investing in additional workers. Prior to the tariffs, we expected monthly job growth of about 150,000 new positions to continue. Now, that could fall below 100,000, if enough employers decide to hold off on hiring while they sort out the effects of the new tariffs on both their businesses and on the economy as a whole.
The signs of a slowdown in the labor market make it more likely that the Federal Reserve will cut interest rates this fall. The Fed could cut at its September 17 meeting, or it could wait until October 29. The Fed would like to wait longer to see what the impact of tariffs will be on inflation, and whether wage growth comes down, since bigger pay gains make it harder for the central bank to hit its goal of 2% inflation. All eyes will be on Fed Chair Powell’s Jackson Hole speech on August 22, to see how he characterizes the state of the economy and the labor market.
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