The warning tape hangs near the stairs in the Federal Hall across from the New York Stock Exchange in New York.
Michael Nuggle | Bloomberg | Getty Images
That may be controversial, but the July employment report helped confirm the notion that the US economic engine is sputtering.
Non-farm salaries rose to just 73,000 that month. A largely downward revision to the May and June counts reduced the average three-month employment to just 35,000, or less than a third of the same period a year ago.
Traditionally, weak employment growth, an indicator of lagging when it comes to recessions, indicates an economy that may be even slower than some traditional indicators show.
“We’re in a wider economy slowdown, and whether that will lead to a recession is the question I’m asking right now,” said Luke Tilly, chief economist at the Wilmington Trust. “The labor market is important and it’s difficult to measure what happens.”
Wilmington has a 50% chance of the US falling into a recession. Tilly cites concerns about the long-term blow from tariffs that could curb consumer spending, promoting 68% of all economic activity in the first quarter, driving business investment and employment.
In fact, he said pressure from tariffs is one of the reasons why President Donald Trump’s pass-through from taxation has not reached the heavily inflation that many economists have hoped for.
“If consumers are taking on the burden, they spend more on imports, reducing recreational spending, airlines, Disney travel, fun parks, hotels and more,” he said. “We’ve seen it in the data, which is why inflation doesn’t have an impact.”
The reason for optimism
Certainly, at this point, the image of growth is not miserable.
Gross domestic product rose at a 3% per year in the second quarter, providing a lively economic picture on its face.
However, looking at the first half, GDP averaged only grew by around 1.2%, with consumer spending rising by just 1%. The main reason for the big jump in the first quarter was a reversal of the import surge in the first quarter as businesses tried to preempt tariffs. In the first quarter, growth fell 0.5% amidst expansion in imports, down from GDP calculations.
If the July unemployment report portends what’s going forward, the photos will be pessimistic.
“The most likely results are still weak in economic growth compared to late 2025, first half of 2024, first half of 2024 and first half of this year, but PNC chief economist Gus Faucher wrote following his job release on Friday.
“But given the revised reading on the labour market, the risk of a recession increases, and the higher the tariffs, the higher the risk, the higher the risk,” he added. “The higher the growth and tariffs of very weak employment, the easier it is to see that consumers can cut spending and businesses, cut investments, and drive the economy into a recession.”
Goldman Sachs predicts growth will be just 1% in the final two quarters as it is part of a sharp slowdown in actual revenue growth, reflecting the slower consumer spending, lower employment growth, higher tariff-driven inflation and reduced transfer payments (fourth quarter).
“Friday’s pay report brings growth in payroll calculations, bringing closer to greater employment and big data metrics from the broader growth data set, both of which have slowed significantly over the past few months.
Despite the cloudy outlook, White House officials argue that the economy is healthy and only improves when Trump’s one big, beautiful act of bill begins.
Trump herself fired Labor Statistics Director Erica Mantelfer on Friday, opposing the July employment report.
But White House economist Kevin Hassett told CNBC on Monday that revisions are likely to be a concern even if he touted the broader economic strength.
“There are really many good reasons to be very optimistic about the second half of the year, but it suggests that if the revision turns out to be true, it will have less momentum than we thought,” said the director of the National Economic Council, which is considered a leading candidate for a vacant seat on the federal committee.
Looking at the Fed
Trump administration officials have urged the federal government to cut down the benchmark fund levels that supply multiple other consumer interest rates. The Fed has made public comments last week since stabilizing the rate and several officials reported that they believe the labour market is strong.
However, further signs of economic weakness could change that.
Housing data has been insufficient recently, reflecting a decline in buyer levels along with rising prices and stubbornly high mortgage rates.
“What are you doing with the national average of 30 years of mortgage rates still rising 1% close to 7%?” veteran economist and strategist Jim Paulsen wrote in the Sassar Post. “There is nothing “healthy or solid” about these (economic) numbers. They are well below the 2% stall rate and are screaming for help. ”
Other economists reflected that sentiment.
“To me, today’s employment report is going into a recession,” wrote Josh Bivens, chief economist at the Institute of Economic Policy, a left-leaning think tank, after reporting Friday.
“The economy is on the cliff of the recession, and that’s a clear takeaway from last week’s economic data dump,” Moody’s Analysis chief economist Mark Zandy posted on X on Sunday.
Monday bought even worse news, with factory orders falling 4.8%, actually the worst reading since January 2024, but with fewer touches than Dow Jones’ estimates, the conference committee’s employment trend index fell in July, reaching its lowest since October 2024.
The market is resilient
Among the worrying economic signs, stocks are not dramatic, but stocks are falling. Wall Street meets Monday and hopes that the US and the European Union can reach a long-term tariff agreement.
Trading has been volatile recently, with the Dow Jones Industrial Average being 1.7% off over the past month.
“This confirmed a lot of our doubts. Frankly, we were waiting for the other shoes to fall, and now we were some shoes starting to fall,” said George Matillo, chief investment officer at Key Private Bank, about the job number.
Recent trading has seen “a lot of self-satisfaction” as investors largely ignored Washington’s political storm and robbed the prospects of Senario, the best-case economy, Mattillo added.
“Many people were expecting the fact that good times would continue to roll. “We don’t think that, given the fact that the recession is really high, it’s the point that a recession would reveal itself.”
The market is also shaking from the perspective of what the Fed is doing.
Just before the employment report, traders allocated low odds to interest rate cuts at the central bank’s September meeting before returning to pricing on Monday with a nearly 90% chance. However, up until then, there have been several important data releases, and have supplied rhetoric to date.
Mattillo believes economic and policy uncertainty will add to the recipe for caution.
“We have been careful to rebalance our clients away from the overall risk exposure and perhaps some of the risky sectors in the market,” he said.
