Contentious July jobs report confirms the U.S. economy is slowing sharply

Though it may have been controversial, the July jobs report helped confirm the notion that the U.S. economic engine is sputtering.

Nonfarm payrolls rose by just 73,000 for the month, below even the muted expectations. Heavy downward revisions to the May and June count took the three-month average job gains down to just 35,000, or less than one-third the pace for the same period a year ago.

Traditionally a lagging indicator when it comes to recessions, the weakness in job growth points to an economy that may be slowing even more than some of the traditional metrics are showing.

“We are in a broad economic slowdown. Whether it translates to a recession or not is the question that I’m asking now,” said Luke Tilley, chief economist at Wilmington Trust. “The labor market is key, and it’s hard to gauge what’s going to happen.”

Wilmington has a 50% chance the U.S. slides into recession. Tilley cites concerns over the longer-term hit from tariffs that could depress consumer spending, which drove 68% of all economic activity in the first quarter, as well as business investment and hiring.

In fact, he said pressure from tariffs is one of the reasons that the pass-through from President Donald Trump’s levies hasn’t hit inflation as hard as many economists expected.

“If consumers are shouldering the burden, they’re spending more for imports and they will cut back on recreational spending, airlines, Disney trips, fun parks, hotels, all of that,” he said. “We’ve seen that in the data, and that’s why there’s not inflationary impact.”

To be sure, the growth picture is far from dire at this point.

Gross domestic product increased at a 3% annualized pace in the second quarter, providing on its face a picture of a vibrant economy.

However, when looked at for the first half, GDP averaged only about 1.2% growth, with consumer spending barely up 1%. The primary reason for the big jump in Q2 was a reversal in the import surge during the first quarter as companies sought to get ahead of tariffs. In the first quarter, growth fell 0.5% amid the swell in imports, which subtract from the GDP calculation.

If the July unemployment report portends what’s to come, the picture is bound to get gloomier.

“The most likely outcome is still weaker economic growth in the second half of 2025 and early 2026 compared to 2024 and the first half of this year, but no recession,” Gus Faucher, chief economist at PNC, wrote following the jobs release Friday.

“But given the revised read on the labor market, recession risks are elevated, and higher tariffs make that risk even higher,” he added. “It is easy to see how very weak job growth and higher tariffs could cause consumers to cut back on their spending and businesses to cut back on their investment, pushing the economy into a recession.”

Goldman Sachs forecasts growth to be just 1% in the final two quarters due in part to slower consumer spending and “a sharp slowdown in real income growth that reflects weaker job growth, higher tariff-driven inflation, and reductions in transfer payments in [the fourth quarter] that were included in the recent fiscal bill.”

“Friday’s payrolls report brings payroll growth closer in line with big data indicators of job gains and the broader growth dataset, both of which have slowed significantly in recent months. Taken together, the economic data confirm our view that the US economy is growing at a below-potential pace,” the firm said in a note over the weekend.

Despite the cloudy outlook, White House officials insist the economy is sound and will only get better once Trump’s One Big Beautiful Bill Act kicks in.

Trump himself pushed back hard against the July jobs report, firing Bureau of Labor Statistics Commissioner Erika McEntarfer on Friday as he called the numbers “FAKED” and “RIGGED” in a Truth Social post.

However, White House economist Kevin Hassett on Monday told CNBC the revisions were concerning even as he also touted broader economic strength.

“There are a lot of really good reasons to be super optimistic about second half of the year. But absolutely that jobs number, if the revision turns out to be true, does suggest that there’s less momentum than we thought,” said Hassett, director of the National Economic Council who is thought to be a leading contender for a vacant seat on the Federal Reserve Board of Governors.

Trump administration officials have been calling on the Fed to cut its benchmark funds level that feeds into multiple other consumer interest rates. The Fed last week held the rate steady, and several officials made public comments since the report saying they still think the labor market is strong.

However, further signs of economic weakness could change that.

Housing data has been poor lately, reflecting a declining level of buyers along with rising prices and stubbornly high mortgage rates.

“What are we doing with a national average 30-year mortgage rate still close to 7% in an economy growing at 1%?” veteran economist and strategist Jim Paulsen wrote in a Substack post. “There is nothing ‘healthy or solid’ about these [economic] numbers, they are way below the 2% stall speed, and shout for help.”

Other economists echoed that sentiment.

“To me, today’s jobs report is what entering a recession looks like,” Josh Bivens, chief economist at the Economic Policy Institute, a left-leaning think tank, wrote after the Friday report.

“The economy is on the precipice of recession. That’s the clear takeaway from last week’s economic data dump,” Mark Zandi, chief economist at Moody’s Analytics, posted Sunday on X.

Monday bought more bad news, with factory orders falling 4.8%, actually a touch less than the Dow Jones estimate though the worst reading since January 2024. Also, the Conference Board’s employment trends index declined in July, hitting its lowest since October 2024.

Amid the worrying economic signs, stocks have fallen though not dramatically. Wall Street rallied Monday, with hopes rising that the U.S. and European Union will be able to reach a long-term tariff agreement.

Trading has been volatile lately, with the Dow Jones Industrial Average off 1.7% over the past month.

“This confirmed a lot of our suspicions. Frankly, we were waiting for the other shoe to drop, and now we’re starting to see a few shoes drop,” George Mateyo, chief investment officer at Key Private Bank, said of the jobs numbers.

Trading lately has seen “a lot of complacency” as investors largely ignored the political storms in Washington and took a best-case-scenario outlook toward the economy, Mateyo added.

“A lot of people were anticipating the fact that the good times would keep rolling, and indeed they probably will,” he added. “We still don’t think the base case is that a recession is going to manifest itself. But it’s going to be a pretty big slowdown, given the fact that uncertainty is really high.”

Markets also have vacillated in terms of what they see the Fed doing.

Just before the jobs report, traders were assigning low odds to a rate cut at the central bank’s September meeting, then swung back to pricing in Monday a nearly 90% probability, according to the CME Group. However, there are multiple key data releases until then, and Fed rhetoric this far has been tepid regarding easing.

Mateyo sees the economic and policy uncertainty adding up to a recipe for caution.

“We’ve been cautioning clients to look at their overall risk exposures and perhaps rebalance away from some of the risky sectors of the market,” he said.