Macro Signposts | 6 August 2025

This week, I asked economists Allison Boxer and Graeme Westwood to guest author Macro Signposts, sharing an analysis of the U.S. job market in five charts.

Downshifting to Neutral: Labor Market Revisions Spark Fears of Slower Growth

By Allison Boxer and Graeme Westwood

The July nonfarm payroll report missed expectations, with hiring slowing to 73,000 — well below the Bloomberg consensus of 105,000. However, the bigger surprise was a sharp downward revision of 258,000 to job gains over the prior two months, painting a markedly different picture of the U.S. labor market. Bond markets, which had reflected the lack of guidance on the outlook for rate cuts at the Federal Reserve's meeting two days earlier, quickly repriced expectations. As a result, 2-year U.S. Treasury yields dropped about 27 basis points (bps) during the day.

However, we believe the revised labor market data points to a cooling economy — not a collapse. The revised pace aligns with growth closer to 1%—1.5%, down from nearly 3% in both 2023 and 2024. Last week's GDP report confirmed that real consumption growth slowed to 1% in the first half of 2025, compared to nearly 4% in the second half of 2024. The jobs report reinforced signs of deceleration due to numerous headwinds: Tariffs are resulting in trade sector layoffs, government layoffs are continuing, softer consumption is translating to weak leisure-sector hiring, and immigration policy changes are affecting both labor supply and demand.

Here are five charts that illustrate changes in the U.S. labor market:

Figure 1: Total nonfarm payrolls excluding healthcare have turned negative
Three-month moving average of payroll hiring excluding private healthcare and education (thousands)

Figure 1

Source: Bureau of Labor Statistics and PIMCO as of July 2025

The pace of hiring has slowed, particularly in more cyclical, economically sensitive sectors. After revisions, the three-month-average for payroll gains stands at just 35,000 — down sharply from 232,000 in January. Hiring in cyclical sectors has essentially stalled, with job growth concentrated in less cyclical sectors such as healthcare and education.

Figure 2: Payroll revisions were the main news in July's Jobs Report
Two-month nonfarm payroll revisions as a percent of total employment

Figure 2

Source: Haver Analytics, Federal Reserve Bank of Philadelphia, and PIMCO calculations as of July 2025.
The vertical lines correspond to NBER recession dates.

The bigger news from this report was not the pace of hiring in July, but the large negative back-month revisions. While labor market data is typically revised over time, the July report featured one of the largest two-month revisions outside of a recession — especially when adjusted for the size of the overall labor market. Historically, revisions have tended to be larger around economic turning points, such as recessions, and upward revisions were common during the post-pandemic recovery.

The July revisions prompted the White House to fire the chief statistician in charge of compiling the data later that day.

Why do these revisions occur? The BLS's initial monthly payroll estimates rely on incomplete responses from firms and statistical assumptions that account for things such as firm creations and closures. As more data becomes available in subsequent months, revisions are made. A more comprehensive annual revision — based on state tax records — is also conducted. Preliminary data from the Quarterly Census of Employment and Wages suggests this year's annual revisions could be significantly large and negative. Fed Chair Jerome Powell warned in last week's press conference that this could be coming.

The BLS is scheduled to release preliminary annual revisions in early September, just before the Fed's next meeting. The revisions could again suggest that the pace of hiring was weaker than previously thought, something officials may factor into their outlook for the path for interest rates.

Figure 3: Immigration policy likely slows hiring
Total net monthly immigration flows across the U.S. humanitarian immigration programs

Figure 3

Source: Haver Analytics, U.S. Customs and Border Patrol, and PIMCO as of July 2025

We believe the slower pace of hiring also reflects changes to U.S. immigration policy, a fading tailwind we highlighted earlier this year (see: Macro Signposts | U.S. Labor Market Faces Tighter Immigration Policy). U.S. immigration surged in the post-pandemic period, and we think this was a strong contributor to the total pace of hiring over the past few years. However, policy changes, first by the Biden administration and more recently under Trump, have notably slowed the pace of immigration into the U.S. over the past year. Slower population growth should be consistent with a lower steady-state pace of hiring and we expect nonfarm payrolls to continue to remain more muted in the second half of this year as a result.

Figure 4: Real income and spending growth are slowing
Annualized six-month growth in real consumption and income (excluding government transfers)

Figure 4

Source: Haver Analytics and PIMCO as of June 2025

Less immigration — and slower job creation — are also affecting GDP growth. Income growth has slowed amid lower job creation and slower population growth, leaving fewer people to add to consumption or employment. Last week's GDP report showed real consumption grew just 1% on average during the first half of 2025 — consistent with the slower pace of hiring. This suggests that labor market signals and GDP data are now telling a more consistent story about the cooling U.S. economy.

Figure 5: Unemployment holds steady as supply and demand factors remain balanced — for now
U.S. unemployment rate, alongside an estimate of what the rate would have been if labor force participation had remained at January 2024 and 2025 levels.

Figure 5

Source: Bureau of Labor Statistics, Haver Analytics, and PIMCO calculations as of July 2025

Immigration and U.S. demographics are also affecting the unemployment rate. Despite disappointing nonfarm payroll data, the unemployment rate rose only modestly in the second quarter of 2025 to 4.2%, little changed over the past year. We believe lower immigration and aging demographics are reducing labor supply, keeping the unemployment rate steady even as labor demand declines.

Figure 5 shows an alternate scenario, where immigration and retirements did not affect labor supply, as measured by the labor force participation (LFP) rate. In mid-2024, the unemployment rate would have been lower, all else equal, and the rise in unemployment rate that was part of the justification for the Fed to cut 50 bps last September may have been less pronounced. Similarly, if the LFP had not declined recently, the unemployment rate would have risen more notably this year.

Powell mentioned the effects of reduced labor supply several times in his recent press conference. The labor market may remain balanced amid a slowdown in both labor supply and demand, resulting in the unemployment rate staying consistent with the Fed's maximum employment mandate, even if payroll gains decline. But because it's impossible to know fully what is driving the labor market or where it is going, the Fed remains focused on risks. Indeed, Powell flagged downside risks to the labor market six times in his press conference. We think slower labor demand suggests downside risks have risen, and we expect the Fed to resume rate cuts this fall.

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