The U.S. labor market once again defied expectations in the face of President Donald Trump’s second-term unprecedented policy changes — only this time, cooling more sharply than anticipated.
American employers added 73,000 jobs, according to Bureau of Labor Statistics (BLS) figures released Friday. Payroll gains in May and June were also revised downward by a combined — and “eye-popping,” one economist said — 258,000 jobs. Meanwhile, the unemployment rate rose slightly to 4.2 percent, up from 4.1 percent from the previous month.
Some economists cautioned that job growth stalling, alongside the consumer price index picking up, is a warning sign that stagflation and recession loom. Earlier this week, the Federal Reserve held interest rates steady for the fifth time, but this week’s economic indicators are putting the Fed in a bind, as it will have to face trade-offs.
“I’m very happy not to be the Fed right now,” said Martha Gimbel, executive director of the Budget Lab at Yale. “This is a really, really tough operating environment for them.”
The Fed had been operating on the assumption that the job market was stable as it waited to see the inflationary impacts of Trump’s aggressive tariffs. But today’s figures surprised everyone.
“That big quarter of a million down-revision to the last two months really suggests that the underlying fundamentals were perhaps nowhere near as strong as previously thought,” said James Knightley, U.S. chief international economist at ING.
Trump claimed the numbers were “rigged,” without citing any evidence. Within hours after the report’s release, the President ordered the firing of BLS head Erika McEntarfer “immediately” through a post on social networking site Truth Social.
Economists were interpreting this week’s reports as proof that Trump’s policies were taking their toll on the U.S. economy. Sooner rather than later, the Fed may act preemptively and decide between cutting rates to cushion the job market already being stifled by weak hiring and stricter immigration policies, and holding rates steady to arrest tariff-driven inflation. Sam Kuhn, an economist at Appcast, said the central bank may decide to look through rising prices as a one-time adjustment and cut rates to support the labor market.
But if consumers believed that price hikes will bleed into services, then it becomes “very tricky,” said Kuhn. “The Federal Reserve can’t ignore a balance of risks, and they have to make a decision between keeping the labor market from deteriorating more or deciding that they have to keep inflation things down.”
Whether indicators pointed to stagflation or recession — or not yet — what’s sure is that the onus is on the Fed to prevent momentum from building.
Gimbel also pointed out that while the unemployment rate continued to teeter in the low fours, the employment-population ratio has been declining “in a way that is, in fact, consistent with recessions.” This means fewer people are participating in the labor force. July’s numbers dropped by 863,000 from three months ago.
Federal government employment also continued its downward trend in July and can be expected to do so until September, the deadline given for federal agencies to comply with the Department of Government Efficiency (DOGE) reduction and reorganization initiative.
The main sectors currently uplifting the job market — health care, social assistance, and leisure and hospitality — are also vulnerable in the current political and economic environment. The three sectors all have a significant share of foreign workers that may be held back by stringent immigration policies. The recently passed One Big Beautiful Bill Act that would impose Medicaid cuts could also reverse trends in the industry. And, when consumers start cutting back on their spending in anticipation of price hikes, dining out and travel would typically be the first expenses to go.
For job seekers in professional and business services, manufacturing, retail, and other sectors, prospects are much more difficult to find.
The jobs report showed another concerning trend: long-term unemployment is rising. The number of people unemployed for at least 27 weeks grew by 179,000 to 1.82 million in July — meaning, one out of four unemployed individuals has been out of work long-term.
Among them is Amy Doerwang, formerly a preschool teacher in Basking Ridge, New Jersey. She left her job in September because of a medical emergency and did not qualify for unemployment benefits. She received temporary disability insurance for three months and some financial help from the school’s owner and some of her pupils’ parents.
“Of course, that’s not going to get you too far,” she said. Since then, she has been trying to sell her art — in one instance, her art got published in the cover of an academic journal and paid $400. “But it happens so infrequently.”
The fact that unemployment has not risen sharply could be the result of a lack of firing, not a lot of hiring, as the rise in long-term unemployment illustrated. As in the case of Doerwang, it was much harder to find a new job after losing one.
Now, though, the labor market has “shifted from a low-hiring, low-firing environment to one characterized by virtually no hiring,” Olu Sonola, Fitch Ratings’ Head of U.S. Economic Research, said in a statement.
Doerwang, who would soon mark a year of unemployment, recently completed an online copywriting course. She has accepted the fact that looking for gigs may be her best option, for now.