Labor Market Update: August 2025

Overview

The July 2025 jobs report from the U.S. Bureau of Labor Statistics (BLS), released on August 1, has significantly altered the labor market outlook. Following June’s optimistic signals of stabilization, July’s data delivered a stark reversal, highlighting persistent cooling and heightened downside risks. Below, we analyze key takeaways and their implications for investors.

Key Takeaways from the July Jobs Report

Establishment Survey

• Nonfarm Payrolls: July added just 73,000 jobs, falling short of the consensus estimate of 104,000.

• Private Payrolls: Grew by 83,000, below the expected 100,000.

• Revisions: A staggering downward revision of 258,000 jobs for May and June reduced reported gains from 144,000 and 147,000 to just 19,000 and 1,000, respectively. This slashed the three-month average nonfarm payrolls growth from 150,000 to 35,000.

• Hours Worked: Increased slightly to 34.3 hours, exceeding expectations of no change.

Household Survey

• Unemployment Rate: Rose to 4.28%, erasing June’s decline and approaching 4.3%.

• Household Employment: Declined by 260,000, with the labor force contracting by 300,000, driven by a 560,000 drop in foreign-born workers.

• Labor Force Participation: Fell to 62.2%, down 40 basis points since April.

• Prime Age Employment Rate: Dropped to 80.4%, matching lows from March 2025 and November 2024.

Aggregate Earnings

• A bright spot: Aggregate earnings rose 0.7% due to a longer workweek and higher average hourly earnings, with a 4.6% annualized growth over three months. However, this may reflect compositional distortions from the exit of lower-wage foreign-born workers.

Market Implications

The soft July data, combined with historic revisions, paints a picture of a labor market losing momentum. Markets have reacted swiftly:

• Equities pulled back as investors reassessed labor market strength.

• Rates markets have priced in two Federal Reserve rate cuts by year-end, with a 50-basis-point cut in September gaining traction if August data disappoints.

This echoes last year’s dynamics, when unexpected labor market weakness triggered the Sahm Rule and a growth scare. Unlike last year’s rising participation, declining participation and employment rates now suggest the unemployment rate (U-3) may understate labor market slack. If participation had held at April levels, the unemployment rate could be closer to 4.9%.

Our Perspective

The July report dismantles the narrative of a resilient labor market. Key trends we’ve monitored persist:

• Slowing Payrolls Growth: The three-month average is near stall speed.

• Narrowing Breadth: Job growth is concentrated in acyclical sectors like healthcare and education, with cyclical employment stagnant.

• Rising Unemployment: The U-3 rate continues its upward grind.

• Declining Participation: The labor force participation rate hit its lowest level since November 2022.

• Weakening Attachment: Prime age employment-to-population ratios are declining, a rare occurrence outside recessions.

Federal Reserve Governor Waller’s recent comments underscore the risk: “When labor markets turn, they often turn fast.” Without a policy response, nonlinear deterioration is possible. The Fed must remain vigilant to these growing risks.

Data Integrity and Public Trust

Recent scrutiny of BLS data collection, coupled with cost-cutting measures, raises concerns about statistical reliability. While revisions enhance data quality, they can erode public confidence. The upcoming replacement of BLS leadership will require Senate confirmation, limiting the scope for manipulation. However, reduced collection efforts pose a greater threat to data integrity, which we view as critical for informed decision-making.

Investment Implications

• Equities: The cooling labor market increases downside risks, particularly as we enter the seasonally weak August–October period. Investors should prepare for potential volatility.

• Fixed Income: Expectations of Fed rate cuts support duration exposure, but yields may remain volatile as markets digest labor data.

• Portfolio Positioning: We recommend a defensive tilt, favoring sectors like healthcare and consumer staples, while maintaining liquidity to capitalize on potential pullbacks.

Conclusion

The July jobs report signals a labor market at a turning point. While aggregate earnings suggest some resilience in nominal consumption, underlying weaknesses—declining participation, narrowing job growth, and significant revisions—point to mounting risks. Investors should monitor August’s data closely, as another weak report could solidify expectations for aggressive Fed action. We remain cautious, prioritizing capital preservation while seeking opportunities in oversold conditions.