Summer swoon

Bottom line

The combination of federal government downsizing, immigration restrictions and tariff uncertainty collectively came home to roost over the past three months, resulting in weaker-than-expected payroll growth. Over the past three months, nonfarm payroll gains have averaged 35,000 jobs per month, the weakest pace of job creation since the depths of the Covid pandemic.

The labor market was soft across the board in July. Headline payrolls rose by a lower-than-expected 73,000 jobs in July (consensus at 104,000, Federated Hermes at 151,000). But the bigger story was the substantial downward revision of May and June results by a combined 258,000 jobs. The Labor Department reduced May’s preliminary count from 144,000 to 19,000 jobs and June’s from 147,000 jobs to 14,000. 

Similarly, private payrolls posted a weaker-than-expected increase of only 83,000 jobs in July (consensus at 100,000). But May and June figures were collectively lowered by a combined 139,000 jobs. May’s payroll growth fell from 137,000 to 69,000, and June tumbled from 74,000 jobs to a gain of only 3,000.

As we had cautioned last month, elevated government hiring in May and June appeared overstated and was ripe for a downward revision. In July, labor growth in this sector experienced a softer-than-expected loss of 10,000 jobs (consensus gain of 4,000 expected). But previously reported hiring in May and June was collectively lowered by a combined 119,000 jobs. June fell from a gain of 73,000 to 11,000, and May from 7,000 jobs to a loss of 50,000.

It wasn’t just payrolls Household employment lost 260,000 jobs in July, marking a decline for the third time in the last six months. Moreover, the rates of unemployment and labor impairment rose to 4.2% and 7.9% in July, respectively, and the participation rate fell for the third consecutive month to a nearly three-year low of 62.2%. In addition, wage inflation also ticked up to an annual rate of 3.9%. In fact, the only positive in this morning’s report is that hours worked ticked up to 34.3.

DOGE making a dent Federal government payrolls have collectively declined by 84,000 jobs over the past six months through July. But according to Challenger, Gray & Christmas, the Trump Administration has reduced government payrolls by some 292,000 federal workers over the past six months. However, employees who are on paid leave or receiving severance are still counted as employed, and some workers may have already found new jobs in private industry. Bloomberg expects at least a half million U.S. jobs could be impacted, when counting universities, contractors, nonprofits and others who rely on government funding.

Immigration crackdown contributing to weakness The participation rate for foreign-born workers declined from 67.3% in July 2024 to 66.1% last month, while the number of foreign-born workers not in the labor force rose by 4.0% over the past year. Immigrant labor participation had been rising strongly over the past few years. In contrast, the native-born participation rate eased from 62.3% in July 2024 to 62.0% last month, while the number of native-born workers not in the labor force increased by only 3.1%. In the aftermath of the recent crackdown on immigrant labor, native-born workers have picked up some of the slack. But that trend is unlikely to be sustainable longer term. To achieve our longer-term economic goal of sustainable 3% GDP growth, the U.S. needs to expand legal immigration to supplement the dearth of native-born workers in some industries, such as agriculture, hospitality, construction, factory work, and child- and elder-care.

Did the Federal Reserve err Wednesday? For its fifth consecutive policy meeting this year, the Fed kept interest rates unchanged, leaving the fed funds rate in a range of 4.25-4.50%. But Chair Jerome Powell faced two dissents from members of the Board of Governors for the first time since 1993. Christopher Waller and Michelle Bowman (both Trump appointees) voted for immediate quarter-point interest rate cuts at the July 30 meeting.

With the economy slowing and the unemployment rate rising, Waller and Bowman have a valid argument. Other voting members on the Fed are seemingly more concerned about a potential spike in inflation in coming months due to Trump’s trade and tariff policies. But Waller said, before the jobs report was released, that “tariffs are one-off increases in the price level and do not cause inflation beyond a temporary increase." He cautioned that the Fed should not wait until the labor market deteriorates before cutting the policy rate. “When labor markets turn, they often turn fast,” he concluded prophetically. We at Federated Hermes continue to expect a quarter-point cut in September and December.

Other key labor-market indicators were mixed

• ADP private payroll survey rebounds July posted a stronger-than-expected gain of 104,000 jobs, a four-month high, up sharply from a loss of 23,000 jobs in June and above the expected consensus gain of 76,000 jobs. Workers who changed jobs last month saw their wages rise 7.0% year-over-year (y/y), less than half the cycle peak of 16.1% in April 2022. Those who remained in their present positions earned a more modest boost of 4.4% y/y, well below the peak of 7.8% in September 2022. 
• Initial weekly jobless claims decline This high-frequency leading employment indicator soared to an eight-month high of 250,000 for the week ended June 6. But claims have dropped 13% to a three-month low of 217,000 over the past two months. 
• Challenger, Gray & Christmas layoffs soar Employers announced that layoffs of more than 62,000 in July surged by 140% from a year ago and were 29% higher than June’s 48,000. Technology layoffs of more than 13,000 accounted for 21% of total layoffs in July. On a year-to-date basis, government layoffs totaling 292,000 accounted for nearly 39% of total layoffs. 
• Job Openings and Labor Turnover Survey (JOLTS) declines June job openings were a slightly weaker-than-expected 7.437 million, down almost 4% from 7.712 million in May, but still 39% below a record 12.182 million job openings in March 2022. The rate of job openings fell to 4.4% in June from 4.6% in May, but well below a record 7.4% in March 2022. The ratio of available job openings for every unemployed worker held steady at 1.1 in June, up from a four-year low of 1.0 in March, but down sharply from a peak of 2.0 in March 2022.

Unemployment and labor impairment rates rise, participation rate declines Household employment (an important leading employment indicator) lost 260,000 jobs in July, shedding workers for the second time in the past three months, versus a gain of 93,000 in June. The unemployment rate (U-3) ticked up to 4.2% in July, up from a four-month low of 4.1% in June. That’s below July 2024’s three-year high of 4.3%, but above April 2023’s 53-year low of 3.4%. The Fed expects U-3 to rise to 4.5% by year-end. The labor impairment rate (U-6) rose to a four-month high of 7.9% in July, up from 7.7% in June. That’s below 8.0% in February, its highest reading since 2021, but well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate surprisingly dropped to a nearly three-year low 62.2% in July from a seven-month high of 62.6% in April, likely due to a decline in immigrant labor. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020.

Wage inflation and hours worked rise Average hourly earnings rose by an in-line 0.3% month-over-month (m/m) in July, up from a 0.2% gain in June, which was half of May’s 0.4% gain. Wage growth rose by a hotter-than-expected 3.9% y/y in July, up from a 3.8% y/y pace in each of the three previous months. The Fed is targeting a 3% gain. 

Meanwhile, average weekly hours worked ticked up to a stronger-than-expected 34.3 in July. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to change a worker’s hours before they alter their staff size. 

K-shaped recovery gap narrows The unemployment rate for highly educated workers rose to 2.7% in July from 2.5% in June, up from September 2022’s cycle low of 1.8%. That of less-educated workers shrunk to 5.5% in July from 5.8% in June, above its 31-year low of 4.4% in November 2022, perhaps due to these workers replacing immigrant labor.

Sector details mixed

• Temporary help (an important leading employment indicator) lost 4,000 jobs in July for the sixth time in seven months. This sector has lost jobs in 36 of the past 39 months. 
• Manufacturing lost a worse-than-expected 11,000 jobs in July (consensus at breakeven), compared with losses of 15,000 jobs in June and 11,000 in May. This sector has been breakeven or lost jobs in four consecutive months, perhaps related to tariff uncertainty. 
• Construction added 2,000 jobs in July, after adding 3,000 jobs in June and 2,000 jobs in May. After last year’s hurricanes and the wildfires, we expected construction to accelerate in the spring and summer from demand for rebuilding. 
• Retail added 16,000 jobs in July, after losing 14,000 in June and 15,000 jobs in May. March and June spending was strong. 
• Leisure & hospitality hired only 5,000 workers in July and 4,000 in June, after adding 27,000 in May, 18,000 in April and 45,000 in March. This slower pace may be related to the decline in immigrant participation.

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