Submitted by Uric Dufrene, Ph.D., Sanders Chair in Business, Indiana University Southeast
The Super Bowl of economic indicators – the national jobs report – came out last week, and it was hard to find much to cheer about.
Over the past three months, U.S. payroll growth has averaged just 35,000 jobs per month. That average includes the 73,000 jobs added in July, but even this figure may be revised lower, as May and June saw steep downward revisions totaling more than 250,000 jobs. Excluding the losses during the COVID recession, we have to go back to the Great Recession (2007–2009) to find job growth as weak.
Following the latest employment report, expectations for a Fed rate cut in September surged. Markets are now pricing in three cuts before year’s end — September, October, and December. As noted previously, the Fed should have cut in July. Two Fed Governors, Waller and Bowman, dissented at that meeting, but the majority kept rates unchanged.
The household survey, which gives us labor force data, offered no relief. It showed employment down by 260,000 and the number of unemployed up by 221,000. The unemployment rate ticked up from 4.1% to 4.2%, and the labor force participation rate slipped from 62.2% to 62.1%. That decline is the opposite of what’s needed to expand the supply side of the economy — a key part of the administration’s growth strategy, especially to offset the drag from higher tariffs.
The promised boost to manufacturing from the highest tariffs in decades hasn’t appeared in the data. In fact, the numbers suggest the opposite. Manufacturing payrolls fell by 11,000 in July, the third straight monthly decline. Since February, the number of unemployed in manufacturing has climbed from 459,000 to 641,000. Year-over-year manufacturing job growth has been negative since October 2023, and the pace of decline has accelerated this year. This will have implications for Indiana and Kentucky.
The ISM Manufacturing Index, considered to be soft data based on a survey, fell to 48.0 in July, below the expected 49.5 and marking the fifth consecutive month in contraction territory. An ISM reading below 50 signals contraction; above 50 signals expansion. The index briefly topped 50 in January and February — the first time since 2022 — but has been stuck in contraction since. New orders, a component of the overall index, have shown some recovery since March but remain below 50. The latest factory orders report showed a decline of nearly 5% last month.
At first glance, the latest GDP report seems like a bright spot, with Q2 growth at 3.0%. But looking under the hood reveals a different story. Most of the gain came from a sharp drop in imports, which mechanically boosts GDP. This followed a Q1 surge in imports as businesses tried to get ahead of new tariffs. Real final sales to domestic purchasers — a better measure of consumer and business demand — rose just 1.2%, down from 1.9% in Q1 and the weakest since late 2022.
As I’ve written before, the outlook comes down to the consumer and the labor market. Right now, neither is strengthening. The U.S. remains a service-driven economy, but service sector growth is showing signs of slowing as well. While inflation remains on their radar, weaker growth will likely take priority, and softer price increases will follow. The September cut seems all but certain — the question is whether it will be soon enough to avoid a recession.
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