Weak Employment Report and New Tariff Rates Weigh on Markets

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Stocks were down for the week, and bond yields fell (yields and bond prices have an inverse relationship) as weak employment data and an announcement of higher than expected tariffs for several U.S. trading partners, including Canada, reignited concerns of an economic slowdown. The latest nonfarm payroll report from the Bureau of Labor Statistics (BLS), which we detail later in the commentary, showed hiring in June came in well below Wall Street estimates. Perhaps more important, gains reported for the prior two months were revised significantly lower.

The BLS report is the latest in a recent flurry of measures showing that the impact of tariffs is seeping into so-called hard data. Before June’s economic releases (and the revisions to the jobs data), the levies’ impact primarily had been restricted to data from surveys of consumers and businesses. Some investors concluded that the lack of apparent effect on the real economy showed our economy’s resilience and suggested it could withstand the expected drag that would result from the levies. The evidence of tariffs hitting hard economic measures, coupled with the Trump administration’s unveiling of new and higher than expected duties on goods from countries that failed to reach a deal with the U.S. before the administration's August 1 deadline, forced many investors to reconsider their views.

Whether hard data will continue to weaken as a result of trade policy remains unclear. As we noted last week, the potentially stimulative aspects of deregulation and the recently approved tax and spending legislation known as the One Big Beautiful Bill could provide a boost to the economy that offsets the drag from tariffs. However, it may take months before it is clear how the crosswinds in the economy play out. Indeed, Federal Reserve Chair Jerome Powell noted during his press conference following last week’s Federal Open Markets Committee (FOMC) meeting that the effects from trade policies have taken longer than expected to show up in the economy, and he said the Fed would need to be patient and watch the data before deciding whether to adjust rates. Powell also acknowledged that price increases from levies could amount to a one-time step-up in consumer costs as opposed to a persistent march higher for prices. He suggested that if the labor market showed signs of deteriorating, the Fed may be in the difficult position of trying to steady the employment picture before the ultimate impact of tariffs on prices is fully understood.

Lackluster hiring in recent months echoes the summer of 2024. Last summer, the FOMC held rates steady during its July meeting, in part due to still solid economic numbers, only to see a slowdown reflected in an uptick in the unemployment rate two days later. The Fed then voted to cut rates by 50 basis points at its September meeting.

While it is too early to tell if the FOMC will take a similar course this time, many investors are expecting some movement at the Fed’s meeting this September. Before the jobs numbers came out, the markets were pricing in a less than 40 percent chance of a rate cut in September. After the release, market pricing suggested an 87 percent chance of a 25-basis-point cut at the FOMC’s next meeting and a near certainty that there will be two cuts in total by year end. To be sure, market predictions of when the Fed may act on rates are notoriously fickle. What the Fed does in September will likely be influenced by the next round of jobs and inflation data. Will hiring rebound in August, as it did last year? Or were last week’s numbers a sign that the job market is beginning to wobble? It is impossible to know for sure.

Uncertainty remains high—and the way to manage it has not changed. We do not believe the unpredictability in the economy and the markets calls for dramatic changes to your investment plan. The current environment serves as a valuable reminder that an unpredictable future will lead to unpredictable opportunities for investors in the intermediate and long terms. Diversification is the best way to capitalize on these unforeseen opportunities.

Wall Street wrap

Weak jobs report: The latest nonfarm payroll report from the BLS showed 73,000 new jobs added in July, fewer than economists expected. That number accounts for 83,000 new private-sector jobs and 12,000 lost government positions. Health care and social assistance, which typically are not sensitive to broader economic forces, contributed 73,000 new jobs, while manufacturing, which is more sensitive to fluctuations in the economy, lost 11,000 jobs for the month.

Contributing to the worsening jobs picture, the BLS revised its jobs numbers down for the previous two months. May’s jobs figure was changed from 144,000 to 19,000, and June’s was changed from 147,000 to 14,000, bringing the average number of jobs added per month for the past three months to 35,000. The private sector averaged 51,000 jobs per month, driven entirely by the health care and social assistance sectors, which added a monthly average of 68,000. The diffusion index (which measures the portion of the 250 industries covered by the report that added jobs versus those in which employment was unchanged or declining) was 51.2 percent in July, up from 47.2 percent in June. However, the diffusion index’s three-month average is 46.8 percent, a level that during the past 35 years has occurred during or after periods of economic contraction.

The BLS’s other jobs report, the household survey, showed the unemployment rate ticking up to 4.2 percent from 4.1 percent in June. The rise in the unemployment rate came despite the labor participation rate declining to 62.2 percent from 62.3 percent in June. In total, the household report showed 260,000 fewer jobs than in June. It is important to remember that this report is volatile. That said, it indicates that since April, the economy has shed 863,000 jobs, and 793,000 people have dropped out of the labor force.

More on the employment picture: Announced job cuts in July totaled 62,075, up 140 percent from the same month a year ago, according to the latest report from Challenger, Gray & Christmas Outplacement Services. Cuts blamed on tariffs numbered 6,000, while artificial intelligence was listed as a cause for 10,000 layoffs for the month. In total, just shy of 806,400 job cuts have been announced since the beginning of the year, which is the highest total for the first seven months of the year since 2020, during the COVID pandemic. For further context, announced job cuts year to date through July are up 75 percent from the 460,530 announced through the first seven months of 2024 and are six percent above 2024’s full-year total of 761,358.

The surge in job cuts since the beginning of the year has been accompanied by an uptick in hiring, although announced hires have fallen well short of announced job cuts. Through the first seven months of this year, companies announced plans to hire 86,132 people. Although that figure represents an increase of 17 percent from year-ago levels, the total is low in historical terms and in line with 2012 and 2013, when companies were cautious about hiring following the Great Financial Crisis.

Inflation rises: The latest reading of the Personal Consumption Expenditures (PCE) Index from the Bureau of Economic Analysis showed headline inflation of 0.3 percent in June, up from May’s upwardly revised reading of 0.2 percent. The measure is up 2.6 percent on a year-over-year basis, compared to May’s year-over-year pace of 2.4 percent.

Another reason for Fed caution is uncertainty about the potentially inflationary impact of tariffs. The price of goods rose 0.39 percent for the month, continuing a recent trend of higher goods inflation that likely reflects tariffs’ influence. The good news is that services inflation is moderating, with the latest reading showing that services prices rose 0.2 percent, the same rate at which they rose in May. The Core PCE reading, which excludes volatile food and energy costs, was up 0.3 percent after rising 0.2 percent in May. Year-over-year core inflation ran at a 2.8 percent pace in June, unchanged from May’s revised reading. In total, core inflation is stuck above the Fed’s 2 percent target, with the three-month annualized pace of core prices at 2.6 percent and the six- and nine-month annualized rates coming in at 3.2 percent and 2.9 percent, respectively. Core inflation has not been at the 2 percent level since February 2021.

The Dallas Federal Reserve’s Trimmed Mean PCE, which eliminates outliers that can distort traditional PCE readings, offers more evidence that prices appear stuck above the Fed’s target of 2 percent. This indicator’s latest one-month annualized reading shows inflation at 3.4 percent, with the six-month annualized pace at 2.8 percent and the year-over-year reading at 2.7 percent.

GDP rebounds: The initial estimate of second-quarter real gross domestic product (GDP) from the Bureau of Economic Analysis saw the economy growing at a rate of 3.0 percent, exceeding Wall Street expectations and rebounding from the first quarter’s 0.5 percent decline. Consumer spending increased at a tepid 1.4 percent pace during the period, after the first quarter’s weak 0.5 percent increase. The trend for inflation-adjusted consumer spending has been soft, with June real spending rising 0.1 percent after a 0.2 percent decline in May and a 0.1 percent gain in April. Since December 2024, only two months have had solid consumer spending: December 2024 saw purchases rise 0.6 percent; and in March, spending was up 0.8 percent as consumers were trying to get ahead of price increase form tariffs.

The headline number was inflated by a 30.3 percent decline in imports, as tariffs increased the costs for foreign goods. Imports subtract from GDP, so their decline boosted GDP for the quarter. The trend marked a reversal from the first quarter, in which rising imports—spurred by companies’ desire to load up on purchases from abroad in anticipation of tariffs—contributed to the GDP decline.

Averaging the two quarters helps reduce the distortions caused by changing trade policy. For the first six months of 2025, the economy grew at a 1.2 percent annual rate, slower than the 2.3 percent rate in 2024.

Manufacturing shrinks: The latest manufacturing data from the Institute for Supply Management (ISM) showed a reading of 48 (readings below 50 signal contraction), down from 49 in June. Readings for new orders came in at 47.1, up slightly from the previous month’s 46.4 but still representing contraction.

Input costs continued to rise, with the latest reading of the price index coming in at 64.8. While the pace of price increases slowed from May’s level of 69.7, June marked the 10th consecutive month manufacturers have faced rising input costs, and each of the six largest industries reported facing higher input costs. In total, 16 of the 18 industries in the survey reported paying higher prices, and none reported decreased costs. “The Prices Index reading continues to be driven by increases in steel and aluminum prices that impact the entire value chain, as well as tariffs applied to many imported goods,” Susan Spence, chair of the Institute for Supply Management Manufacturing Business Survey Committee, said in comments released with the report.

Slowing demand and higher costs are taking a toll on payrolls, with the latest reading of the employment index dropping to 43.4 in July, down from June’s reading of 45. Survey responses show that comments related to layoffs outnumbered new hires by a 2:1 ratio. None of the six largest industries reported adding staff, and of the 18 total manufacturing industries covered by the report, just three noted hiring. These results are consistent with the hard data in the BLS’s nonfarm payrolls report.

Consumer confidence improves slightly: The Conference Board’s Consumer Confidence Index released last week came in at 97.2 for July, up two points from June. This was just the second time in the past seven months that consumer confidence rose. Consumers were more optimistic about future income this month and less pessimistic about future business conditions and employment.

While consumer confidence has stabilized somewhat since May, it remains relatively low. The labor differential, which measures the gap between those who find it easy to get a job and those who find it difficult, declined for the seventh consecutive month, with 18.9 percent of consumers saying jobs were hard to get in July, up from 14.5 percent in January. Expectations for the future rose 4.5 points to 74.4, still below the 80-point threshold that signals the possibility of a coming recession. Meanwhile, many consumers expressed concern that tariffs would lead to higher prices.

The week ahead

Tuesday: A light week of data kicks off with the mid-morning release of the latest Purchasing Managers Services Index from the Institute for Supply Management. Recent data has shown increased inflationary pressures and modest growth in the services sector. Given that the services side of the economy has driven much of the economy’s growth over the past two years, we will be looking for signs of any changes in underlying strength in this report.

Thursday: Initial and continuing jobless claims will be out before the market opens. Initial claims rose marginally last week but remained relatively low, while continuing claims stayed at the same level. We’ll continue to monitor this report for signs of changes in the strength of the employment picture.

The Federal Reserve will release its latest look at consumers’ financial condition in its Consumer Credit report. Consumers have pulled back on credit use recently as their spending has slowed. We will be looking to see if the trend continued.

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