Little margin for error

July 28, 2025

Payrolls are expected to increase by 110,000 in July, after rising 151,000 in June. That is slightly below the 130,000 pace of job gains in the first six months of the year. The headline figures mask an underlying chill. Churn in the labor market has come to a standstill, with the pace of hires and quits dipping well below 2019 levels. That leaves little margin for error should layoffs spike.

This is at the same time that the ranks of the long-term unemployed have swelled and new college graduates are finding fewer opportunities than in recent years. The online job posting site Indeed reported a multiyear drop in internships and entry-level positions in June.

Public sector payrolls are expected to add 10,000 as gains in state and local government jobs more than offset another drop in federal workers. There are downside risks because state and local governments’ budgets are being squeezed, while the collateral damages from cuts to federal funding are beginning to compound.

Federal payrolls will continue to shrink, mostly due to retirements and a hiring freeze. Recent layoffs at the State and Education Departments will not show up until August or later depending on the severance packages. We will hit another cliff in the new fiscal year on October 1 with those who took buyouts and or were put on administration leave earlier this year.

Private sector payrolls are expected to rise by a more anemic 100,000 in July. Healthcare and social assistance will continue to drive gains. Aging demographics and a rise in births last year are the main reasons. Demand in the care economy continues to outstrip supply, with worker shortages beginning to emerge due to a loss in immigration. Women with children under five are losing ground again after increasing their participation earlier in the recovery.

We could see a slight uptick in motor vehicle manufacturing, given later-than-usual shutdowns. There is a lot of effort underway to boost domestic content to ameliorate the rise in costs due to tariffs. Most vehicles currently sitting on dealer lots were manufactured prior to tariffs, which is why the tariffs have not shown up much in prices yet although they are coming. Higher steel and aluminum costs will be key issues. Overall manufacturing activity is expected to remain subdued, while construction activity has shown signs of slowing. The outlier is still data warehouses, which remain on a tear.

Professional and business services are expected to remain weak with more full-time layoffs. A loss of government contracts and weak merger and acquisition activity form the largest headwinds. AI adoption is picking up, which many companies are scaling for clients.

Average hourly earnings are expected to rise 0.2% in July, which translates to a 3.7% increase from a year ago. That is the same as last month but represents a cooling from earlier in the year. Weekly hours worked are expected to remain subdued at 34.2 hours. The only sector showing outsized gains is information, which is boosted by the war for AI talent even as layoff announcements in the sector have picked up.