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July jobs report: Weakness in payrolls increases the likelihood of a September cut

August 1, 2025 | 2 min read
Magdalena Ocampo
Market Strategist

The July jobs report showed a 73,000 gain in payrolls, below consensus expectations, and included substantial downward revisions to the past two months’ releases. Though the unemployment rate only edged up to 4.2%, the weakness in today’s payrolls will likely draw some attention from policymakers, who must now increasingly parse through the complex interaction between weakening labor demand amid declining labor supply.

Non-farm payrolls

Thousands, January 2022–present
Non-farm payrolls in thousands from January 2022 to present

Source: Clearnomics, Bureau of Labor Statistics, Bloomberg, Principal Asset Management. Data as of August 1, 2025.

Report details

  • Total non-farm payrolls increased by 73,000 in July, below expectations of 104,000. Perhaps more alarming are the substantial downward revisions to May and June, which now stand at just 19,000 and 14,000, respectively. The latest payroll prints reveal a significant deterioration in labor demand, though labor supply is offsetting the weakness to some degree. The persistent backdrop of tariff uncertainty, however, points to potential further downside in U.S. employment data.
  • Similar to last month, the overall job growth in July was mixed across industries. The healthcare and financial sectors led employment gains, while payrolls in the retail trade and transportation segments rebounded, signaling an improvement despite the lingering pressures of tariff uncertainty. Contrary to last month, government payrolls declined, with losses in federal and local workers. A further reduction in the federal workforce, combined with a pullback in federal government grant spending, will likely remain a headwind on these sectors ahead. Note that the BLS counts workers on paid leave or ongoing severance or leave as employed, suggesting the broader fallout from federal government layoffs may not materialize until the fall.
  • The gains in leisure & hospitality were minimal. Similarly, the construction sector saw only small gains, with downward revisions to the prior month, revealing that elevated interest rates and labor supply availability remain a challenge for the sector.
  • Further on the downside, there were notable declines in the professional and business services. Job losses were largely driven by administrative and support payrolls, which are most vulnerable to secular trends in automation and AI-driven solutions.
  • The slight uptick in the unemployment rate to 4.2% may not necessarily be flashing warning signs currently, as a shrinking labor supply could help offset weakening labor demand. Further declines in the foreign-born labor force could imply that a tightening in immigration policy is weighing on the labor pool, a trend that could intensify over the coming months. As a result, mixed signals between labor supply and labor demand could add a layer of complexity for interpreting employment conditions ahead.

Policy outlook

In this week’s meeting, the FOMC kept its benchmark policy rate unchanged at 4.25%-4.5%. Interestingly, there were two dissents, including from Fed Governor Christopher Waller whose concerns around slowing labor demand have gained traction within the committee. A meaningful remark from the press conference, however, was Chairman Powell’s acknowledgment of declining labor supply keeping the labor market in balance despite weakening demand. As such, the case for policy easing was not deemed necessary.

After today’s weak payroll print and sizable downward revisions to the prior two months, the odds of a September rate cut have risen meaningfully. While tighter immigration policies may slow labor force growth—effectively lowering the breakeven pace of job gains—the Fed is likely to focus on any signs of softening labor demand. If upcoming jobs and inflation data disappoint again, the case for a cut in September could become clear. Still, underlying structural dynamics in the labor market may continue to limit any sharp rise in unemployment, complicating the policy response.

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