The Wild Week in the American Economy

Job seekers waiting to enter a job fair in Chicago in June.

For months, the economy sent off mixed signals, with employers and consumers expressing anxiety in surveys but underlying economic data generally solid.

This past week, the fog lifted. On Wednesday, official data showed economic output and consumer spending slowed markedly over the first half of the year. Later that day, the Federal Reserve held interest rates steady, citing inflation and a solid labor market.

It was vindicated by another report Thursday that showed price pressures remained stubborn, then contradicted in spectacular fashion Friday by a lower-than-expected rise of 73,000 jobs in July accompanied by a massive downward revision to the prior two months. Job growth in the past three months was the lowest since 2010, except during the peak months of the pandemic. President Trump was so upset at the data he fired the head of the statistical agency that produced it.

“The labor market has just sounded a warning bell,” said Olu Sonala, head of U.S. economic research at Fitch Ratings.

Combined job-growth revisions for two-month periods

While the state of the economy in recent months is now relatively clear, what happens next is not. With tariff uncertainty mostly resolved and tax cuts on the horizon, will growth and the labor market recover, as they did following a brief uptick in unemployment this time last year? Or will conditions deteriorate further, perhaps as tariffs, reduced immigration and government job cuts are more clearly felt?

It isn’t a five-alarm fire—at least not yet. Recession warnings aren’t flashing. The unemployment rate, perhaps the most important data point in the economy, remained low at 4.2% in June, unchanged over the past 12 months.

The stock market, a sensitive but error-prone leading indicator, hit records as recently as Monday on strong earnings. A software design company added momentum to an IPO comeback. Consumer sentiment appears to have stabilized, albeit at a historically low level.

The slowdown is real

In Wednesday’s report, the Commerce Department showed second-quarter gross domestic rebounded to 3% annualized growth, after inflation, from a negative first quarter reading, a pattern heavily distorted by swings in imports.

A different, less reassuring message came from final sales to consumers and businesses, which carves out government spending, inventories and international trade, and is closely watched by Federal Reserve policymakers. It grew just 1.2%, the weakest since late 2022.

There was no sign of a recovery at quarter’s end. Data released Thursday showed consumer spending stagnated during the second quarter.

The reports suggest that Trump’s policies, including the largest tariff increases since the Great Depression, a major crackdown on immigration and steep cuts to government programs and jobs, have begun weighing on demand.

It’s what many economists expected following a sharp deterioration in consumer and business sentiment in surveys earlier this year. But for months, the economy’s main engine—the labor market—appeared resilient. “It was a mystery why it wasn’t showing up earlier,” said economist Julia Coronado, head of MacroPolicy Perspectives. “So no, this isn’t the end of it.”

Hyundai’s new EV manufacturing plant in Ellabell, Ga., has been staffing up.

Friday’s numbers show hiring has been particularly weak in sectors sensitive to the ups and downs of the economy.

From April to July, payrolls fell in mining and logging, manufacturing, wholesale trade and retail trade, which collectively employ more than 35 million.

Hiring has slowed significantly in leisure and hospitality, potentially reflecting a decline in foreign tourism and belt-tightening by U.S. consumers, and in state and local governments. Most job gains in recent months have come in noncyclical sectors like healthcare.

On Friday, the Institute for Supply Management said its purchasing-managers’ index showed manufacturing activity contracted in July for a fifth consecutive month. Survey respondents cited higher uncertainty and Trump’s tariffs.

“For every comment on hiring, there were two on reducing head counts,” said Susan Spence, chair of ISM’s manufacturing survey committee.

Momentary pain?

Administration officials argue that recent weakness is temporary. Stephen Miran, chair of the White House Council of Economic Advisers, said Trump needed to create some uncertainty to achieve the trade deals announced in the past week or so.

“I think what you saw was some of the manifest of that in the jobs data,” Miran said on MSNBC. “But that uncertainty is now resolved.”

Stephen Miran, chair of the Council of Economic Advisers.

As of Friday, Trump had finalized tariffs, via deals or unilateral announcements, on most U.S. trading partners with the exception of Mexico, Canada and China. Few countries have retaliated, precluding the sort of tit-for-tat trade war that many economists feared.

Labor Secretary Lori Chavez-DeRemer said Americans are “enjoying lower prices, a booming stock market and half a million jobs created” over the past several months.

The good news is that layoffs have remained relatively sparse. With fewer immigrants entering the workforce, unemployment could remain stable even at a modest pace of hiring.

But a number of challenges loom. Starting in October, tens of thousands of federal employees who took voluntary buyouts will be off the government’s payrolls and potentially unemployed.

Cuts in federal funding to nonprofits, state and local governments, and universities continue to ripple through those organizations’ budgets.

Nearly eight million student-loan borrowers are likely to face significantly higher payments after the Trump administration moved to wind down an affordable-repayment option.

In addition, many economists say tariffs are only beginning to show up in prices, partly because importers stockpiled goods earlier this year before the duties took effect. In time, businesses say they will pass more tariff costs on to consumers, weighing on their spending.

Many economists expect the president’s tariffs to affect consumer prices and weigh on demand over time.

Ordinarily, softening demand and a cooling labor market would allow the central bank to cut interest rates. Tariffs complicated that. On Wednesday, Fed chair Jerome Powell said “we think we have a long way to go to really understand exactly how” tariffs will affect inflation.

One reason unemployment has stayed stable is lower immigration, economists say. Unauthorized border crossings this year have ground to a halt, slowing growth in the labor supply. Still, job creation probably can’t remain as low as it was from May to July without unemployment starting to climb more meaningfully.

“The speed of the deceleration in job growth, along with uncertainty about what exactly the data means, should be alarming,” said Preston Caldwell, chief U.S. economist at Morningstar.