July data points to fragile labor market and tariff headwinds
The latest U.S. employment report revealed a stark deceleration in job creation, raising serious questions about the strength of the economy. Nonfarm payrolls increased by just 73,000 in July, far below expectations. Downward revisions for May and June further dragged the three-month average job gains to 35,000—less than a third of last year’s pace.
This slowdown in hiring suggests deeper structural weakness. While job numbers often lag during downturns, the persistent slump is drawing comparisons to pre-recession patterns. Wilmington Trust now sees a 50% chance of recession, citing tariffs and slowing consumer spending as critical risk factors. Consumer demand, which drives more than two-thirds of GDP, is now under pressure from inflation and uncertainty.
Tariffs reshape consumer behavior, not just inflation
Economists argue that tariffs imposed under President Trump’s trade agenda have muted the inflation impact by reducing discretionary spending. As prices for imported goods rise, Americans are cutting back on travel, entertainment, and hospitality. Though overall inflation remains high, the pass-through effect to headline prices has been uneven.
Growth indicators present a mixed picture. While Q2 GDP grew at 3% annually, this was largely due to a statistical rebound from Q1’s import surge. When averaged, the first-half GDP comes to only 1.2%, with minimal gains in consumer activity. Goldman Sachs forecasts just 1% growth for the second half of the year, factoring in weak hiring, tariff effects, and expiring fiscal support measures.
Recession debate intensifies as White House reacts
Although administration officials maintain a confident tone, reactions to the jobs report have been heated. President Trump dismissed the numbers as fraudulent and dismissed the head of the Bureau of Labor Statistics. Meanwhile, the White House emphasized long-term optimism tied to Trump’s “One Big Beautiful Bill Act.”
National Economic Council Director Kevin Hassett acknowledged the concerning revisions, but pointed to broader momentum. Still, analysts from Moody’s and the Economic Policy Institute warned that the data looks increasingly recessionary. Housing indicators have weakened, and factory orders just posted their worst result since early 2024.
Markets volatile as investors eye the Fed’s next move
Despite the negative data, financial markets remain resilient, with the Dow posting gains Monday amid hopes for a transatlantic trade resolution. Yet the broader trend remains fragile. The Conference Board’s employment index fell again in July, and volatility has grown across equities and bonds. The Dow is down 1.7% for the month, and investor sentiment is becoming more cautious.
Traders now assign nearly a 90% chance to a rate cut at the Fed’s next meeting, reversing earlier bets on a hold. Economists warn that persistent uncertainty—ranging from tariffs to job market signals—will weigh on investment decisions. Key Private Bank’s George Mateyo advised clients to rebalance away from high-risk sectors, predicting a bumpy path ahead.
