Labor Market Loses Momentum

July’s jobs report delivered a reality check. The U.S. added just 73,000 jobs last month, far below expectations.

Worse, previously reported gains for May and June were revised down by a combined 258,000, erasing much of the hiring momentum economists thought was still in place.

These revisions leave May’s gain at just 19,000 and June’s at a mere 14,000.

Wells Fargo economists noted that fewer than half of industries have been adding jobs for three months in a row, something rarely seen outside of recessions.

The unemployment rate ticked up to 4.2%, with the ranks of the long-term unemployed growing to 1.83 million. Much of July’s hiring came from healthcare and social assistance, sectors that tend to expand regardless of the broader economy’s health.

In contrast, federal government payrolls fell by 12,000, continuing a year-to-date decline linked to administration budget cuts.

Adding to the unease, The Conference Board’s Employment Trends Index fell to 107.55, its lowest reading since October 2024.

While the index remains in a narrow range, suggesting stability, the share of consumers saying jobs are “hard to get” rose to its highest since early 2021.

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Services Sector Slows to a Crawl

The Institute for Supply Management’s Services PMI fell to 50.1 in July from 50.8 in June, barely above the breakeven point between growth and contraction.

The employment component of the index contracted for a second month, even as new orders and business activity stayed positive.

Tariffs topped the list of business concerns, with more respondents reporting higher commodity prices and delayed projects.

Construction and other trade-sensitive sectors saw clients reevaluating feasibility, resulting in postponements or cancellations.

While backlogs rose slightly and core business activity remains intact, ISM officials called the combination of slowing employment and rising prices “worrisome,” which is a mix that could pressure margins if demand cools further.

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The Policy and Market Backdrop

The weak jobs data came just days after the Federal Reserve opted to hold rates steady and keep its options open for September.

Chair Jerome Powell has acknowledged “downside risk” in the labor market, but the Fed wants more evidence before moving.

Markets now see a higher probability of a rate cut in September, though the Fed will have one more jobs report and two inflation readings before that decision.

The timing is complicated by ongoing trade policy shifts, including a new round of tariffs announced late last week.

Immigration policy is another factor reshaping the labor market. The foreign-born workforce has shrunk by 1.65 million since March, while the U.S.-born labor force has grown by 2.65 million.

Industries like construction, landscaping, and meatpacking, which are heavily dependent on immigrant labor, are reporting hiring constraints.

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Investor Strategy in a Cooling Labor Cycle

Slower job growth doesn’t guarantee a recession, but it can change the earnings and market leadership picture quickly.

When fewer industries are expanding payrolls and services hiring contracts, ripple effects spread into consumer spending, business investment, and credit conditions.

Here’s how to think about positioning now:

• Favor resilience over cyclicality: Healthcare, utilities, and select tech remain better insulated from hiring slowdowns than industrials, consumer discretionary, or small-cap financials.

• Watch for margin compression: Rising input costs from tariffs, combined with slower revenue growth, can pressure companies without pricing power.

• Be selective in services exposure: Firms tied to business travel, hospitality, and discretionary leisure may see more demand volatility.

• Keep an eye on credit: If job growth stays weak, consumer credit performance could deteriorate, an early warning sign for lenders and credit-sensitive equities.

• Don’t panic, but adjust: A softening labor market changes risk-reward dynamics. Now is a good time to trim overextended positions in high-beta sectors and add to quality balance sheets.