Whoopsie-daisy
Back
Article Type
Insights
Topic
Macro
Published
August 04, 2025
Read time
5 mins
Author
Frank Rybinski, CFA
PDF
Download
Share

Friday’s’ US payrolls report was soft, with a gain of just 73,000 jobs in July and massive revisions (totaling -258,000) to the payroll readings for June and May.

 

The lion’s share of the labor market is the private ex-healthcare segment of the report—which accounts for 71% of the total—and over the past three months it has now contracted. Virtually all of the net hiring has occurred in the report’s Healthcare & Social Assistance category.

 

3-month moving average of private employement, excluding healthcare growth

Source: Haver Analytics. Data as of August 2025.

While the latest Jobs Openings and Labor Turnover Survey shows there is not much firing going on, there isn’t much hiring either. Over time that means unemployment won’t jump higher, but it will creep higher. And creep higher it did: U-6 unemployment (a broad measure of labor utilization) edged up from 4.117% to 4.248%. It would have gone up more had the labor force participation rate (LFPR) not declined again. That measure slipped to 62.22%, moving firmly through the low end of the range.

 

While the decline in LFPR leads to speculation that it is likely the influence of immigration restrictions, the population numbers are not confirming this. Specifically, we would expect the working-age population to moderate as well, which is not due to acceleration in the native-born population. In fact, while the foreign-born population shrank -625,000, the native-born work-force population grew +826,000 and is now growing at the fastest rate on its short record. (Data started being collected in 2008).

 

Civilian non-institutional population: Native born
% change year to year, NSA

Sources: Bureau of Labor Statistics, Haver Analytics. Data as of August 2025.

 

This is an important point because if population growth doesn’t slow in-kind, then the breakeven employment number will remain north of 100,000 per month, which would be a tall order in this environment. In other words, unemployment could increase rapidly).


Consumer spending power: Our preferred measure of consumer spending power (as a labor income proxy) jumped in July, but that was largely payback for June’s decline. Smoothing it out, the annualized nominal three-month moving average is 4.4%. That’s a low level, which could be made worse in real terms if tariffs do cause a price level adjustment higher (a key to our continued “cooling” theme).


Rapid time-decay in the “theta trade”: We coined the term "theta trade" to signify the Federal Open Market Committee’s (FOMC) appetite to wait, given their stated data dependence. Well, on Friday the time-decay of that option ramped up.

 

Updating forecasts: Recently we switched our odds to 60/40 favoring one rate cut this year. However, with Friday’s data the base case flips back to two cuts with the growing chance of three. The real key in our opinion is the date of restarting rate cuts. If the FOMC cuts in September, then it is growing likely that we get three cuts this year (at the Fed meetings in September, October and December). Skipping a meeting would be more typical of a re-calibration mode, but if the cuts are to fend off a recession scare, then sequential cuts are much more likely.

 

Importantly, it wasn’t just one month of soft data that led to this change, but the sizable negative revisions to the payroll report meant we now have three months of concerning labor data (i.e., an outright three-month contraction in the labor market if you exclude health care). Couple that with an accelerating contraction in interest-sensitive sectors like construction and the coming negative income effect on consumers from tariffs and the “cooling” pressure is only going to increase. Stay tuned.


It’s worth noting that rates rallied hard in the wake of this data as the curve steepened to reflect the likelihood of rate cuts coming sooner than later.

Important Information

Author

Frank Rybinski, CFA
Head of Macro Strategy
Frank Rybinski, CFA, is head of macro strategy responsible for guiding the firm’s global macroeconomic view as it pertains to tactical and strategic asset allocation. This includes analysis of the economy, monetary & fiscal policy, interest rates and the relative value between asset classes.  
View profile
Related Articles
View all Aegon insights