For the past year, the labor market has been treading water. Now, it appears to be cooling more rapidly than previously thought as overall employment gains were just 73,000 in July with significant downward revisions to May and June totaling 258,000 fewer jobs than previously reported for those two months. The unemployment rate rose slightly to 4.2% and wage growth continues to slowly moderate to 3.8% over the year.
Accounting for the revisions to May and June, the three-month average of payroll growth has slowed to its lowest level since the start of the pandemic at just above 35k. Likewise, private employment growth (removing government jobs) has slowed to 51k over a three-month period.
On the heels of the Fed’s decision to maintain rates on Wednesday, policy makers will be forced to make a tough decision between balancing elevated tariff-driven goods inflation against a weaker labor market.
Interpreting the overall job growth figure has an important caveat due to our aging population and lower immigration levels: the “breakeven rate” – the number of jobs needed every month to keep the unemployment rate fixed – is slowing dramatically. Most estimates put the breakeven rate near 90k a month, and with this jobs report we’re likely below that level.
Simply put, the level of hiring activity in the labor market is not enough to maintain our current unemployment rate, likely indicating a higher rate in the short term.
Another eye-popping figure from this report was a massive downward revision to May and June’s job growth. Both months were initially reported to show modest growth—now much weaker than previously thought.
In September’s jobs report, we’re going to get the first glimpse of the benchmark payroll revision, where the Bureau of Labor Statistics (BLS) compares its data to historical unemployment insurance records which are likely to show that job growth has been overstated over the past year.
Revisions are a normal part of the process of reporting economic data as the BLS must balance speed and accuracy; the BLS receives more data after initial reports are released, and the quality of that data determines in which direction (and by how many jobs) the initial figures need to be revised.
Industry job growth
Over the past year, the base of job growth has been narrowing, concentrated in healthcare, leisure & hospitality, and government jobs. That base further narrowed this month, as—outside of healthcare hiring—most industries were flat or contracted on the month. The three-month payroll diffusion index, which measures how new payrolls are shared across industries, fell to 46.8, the lowest since the drop during the peak of the pandemic.
Leisure and hospitality hiring throttled back this month as well, adding just 5,000 jobs. When looking at the revisions to May and June’s numbers, hospitality hiring appears particularly worse off than was initially reported.
Other industries that are showing continuing signs of stress: manufacturing and professional & business services. The manufacturing sector has lost jobs for the third month in a row, declining by a total of 37,000 since May. Hiring also remains weak for “sitting down” jobs in the professional & business services sector, which shed 48,000 jobs over the same period.
Immigration policies are weighing on the labor force
Immigration policy is also impacting the workforce: the labor force declined for the third month in a row—for the first time since 2011. Since April, the total civilian labor force has declined by 793,000, a drop rivaling the workforce decline seen during the Great Recession in the late 2000s.
There is no doubt that the decline in the labor force is a direct result of the Trump administration’s restrictive immigration policies. Illegal immigration has cratered over the last year while the number of deportations is on the rise. As the U.S. native-born workforce continues to age rapidly, immigration will be essential to keep the labor force growing—yet it seems Trump’s policies have removed any likelihood of that happening, at least for now. The implications for the U.S. labor market are substantial; it is not outside the realm of possibility that average monthly job growth will remain stagnant between 0 and 50k in the near future. Americans may need to adjust to an economy with substantially lower job prints, including the occasional negative jobs report even outside of recessionary periods.
Furthermore, some sectors will be affected much more than others by the substantial decline in immigration. Labor shortages might soon appear in sectors like construction, hospitality, and transportation—which are particularly reliant on the foreign-born workforce.
What does this mean for recruiters?
In summary, the labor market is cooling more rapidly than anticipated, with July adding just 73,000 jobs and sharp downward revisions to previous months suggesting even weaker momentum. Employment growth is no longer keeping pace with what’s needed to maintain the current unemployment rate, which has now edged up to 4.2%.
Hiring is increasingly concentrated in just healthcare, while most other industries are flat or contracting. At the same time, restrictive immigration policies are shrinking the labor force, hitting key sectors like construction, hospitality, and transportation particularly hard. Going forward, recruiters should prepare for a persistently weak hiring environment, with lower monthly job growth and the possibility of negative job reports.
