Payrolls poised for a pickup

July 31, 2026

Payroll employment is expected to add 100,000 new hires in July, after rising only 57,000 in June. The public sector is expected to add a modest 5,000 new jobs, while the rest will come from the private sector. Hiring at the state and local levels is expected to overshadow that in the federal government. Federal employment dropped by 350,000 last year to the lowest level since 1966. That was due to a combination of early retirements, buyouts and layoffs. Many agencies remain understaffed but are waiting for funding approval to hire up again.

Demographic shifts are becoming more noticeable, with the peak of 18-year-olds in Generation Alpha moving into the labor market this year, and baby boomers hitting their peak retirement years. The last of the baby boomers will turn 65 in 2029. 

Those shifts are hitting while curbs on immigration are slowing labor force growth. Another swath of Temporary Protection Status (TPS) workers fell off the payrolls in late July. Those workers were mostly Haitian workers who played an outsized role in leisure and hospitality, the care economy and in construction. The largest population of TPS workers was in Florida, Massachusetts and New York. Many Venezuelan workers have already lost their protected status. Florida has the highest concentration of such workers.

Gains in payrolls are expected to be dominated by healthcare and social assistance, although the pace of growth has slowed. Quits in the sector soared in the wake of the pandemic. Much of the catchup from earlier quits has already occurred, while the supply of workers is limited due to changes in immigration policy. 

Cuts in Medicaid at the state level are another hurdle to robust gains in healthcare and social assistance. We will hit a much larger cliff in Medicaid payments in 2027 when cuts stemming from the 2025 tax cuts take effect. Those cuts will come as the demand for healthcare is increasing from aging demographics, although subsidies for supplemental Medicare coverage are on the chopping block as well.

Hiring in leisure and hospitality is expected to pick up after cratering in June. Some of that weakness was due to cooler than usual seasonal hiring for the summer travel season. The seasonal adjustment creates a smaller hurdle in July. Downside risks come from the supply side and the uncertainty over TPS changes. Some workers may have been let go prematurely. Those layoffs do not show up in unemployment claims either, because they are not eligible once their TPS lapses. 

Wages in leisure and hospitality showed signs of accelerating in June, despite the weakness in seasonal hires. That is another tell that supply may have become more of a hurdle than demand. The rise in wages for low-wage workers is a red flag for the Federal Reserve, as it is adding to service sector inflation, which has proven the stickiest. 

The Fed’s Beige Book revealed gains in host cities for the World Cup, but less activity elsewhere. Low and middle-income consumers have been curbing their discretionary purchases. A move downstream by higher income consumers has not made up for those shortfalls at fast-food restaurants and budget destinations. 

Professional and business services are expected to add jobs again; they are starting to play a larger role in supporting overall employment gains. The hiring of accountants, lawyers and temporary help services has driven recent gains. Total employment is up only slightly from a year ago in the sector.

The goods sector is expected to add jobs, with small gains in manufacturing and construction. Vehicle sales picked up in June and likely rose again in July. However, bloated truck and SUV inventories are curbing production in the back half of the year. That could show up in longer-than-usual plant closures for the retooling and maintenance that occurs in July.

Average hourly earnings are expected to rise 0.3%, which will boost wages 3.5% from a year ago. That is the same as June and suggests that the cooling we had seen in wages may be hitting a trough. Wages are still well above the gains we saw pre-pandemic. The challenge is inflation, which after a brief reprieve in June, accelerated again in response to the conflict in the Middle East.

The unemployment rate is expected to come in at 4.2%, the same as we saw in June. Participation in the labor market is expected to hold at the subdued 61.5% pace of June for July. The drop in participation among young workers – aged 25-29 – was particularly acute in June. A loss in immigration and the tougher job market for new college graduates are affecting labor force participation. 

The good news is that firms are beginning to loosen their purse strings and hire again. That should help to lower the unemployment rate among new college graduates, which is currently at 5.6%. 

The U6 or rate of underemployed is expected to edge down to 7.8% from 7.9% in June. The U6 covers those who are forced to accept part- instead of full-time employment and discouraged workers. The ranks of workers unemployed for more than 6 months has swelled to 2 million workers in recent months, almost double the pace of early 2023.