Contentious July jobs report confirms the U.S. economy is slowing sharply

Though it may have been controversial, the July jobs report helped confirm the notion that the U.S. economic engine is sputtering.

Nonfarm payrolls rose by just 73,000 for the month, below even the muted expectations. Heavy downward revisions to the May and June count took the three-month average job gains down to just 35,000, or less than one-third the pace for the same period a year ago.

Traditionally a lagging indicator when it comes to recessions, the weakness in job growth points to an economy that may be slowing even more than some of the traditional metrics are showing.

“We are in a broad economic slowdown. Whether it translates to a recession or not is the question that I’m asking now,” said Luke Tilley, chief economist at Wilmington Trust. “The labor market is key, and it’s hard to gauge what’s going to happen.”

Wilmington has a 50% chance the U.S. slides into recession. Tilley cites concerns over the longer-term hit from tariffs that could depress consumer spending, which drove 68% of all economic activity in the first quarter, as well as business investment and hiring.

In fact, he said pressure from tariffs is one of the reasons that the pass-through from President Donald Trump’s levies hasn’t hit inflation as hard as many economists expected.

“If consumers are shouldering the burden, they’re spending more for imports and they will cut back on recreational spending, airlines, Disney trips, fun parks, hotels, all of that,” he said. “We’ve seen that in the data, and that’s why there’s not inflationary impact.”

To be sure, the growth picture is far from dire at this point.

Gross domestic product increased at a 3% annualized pace in the second quarter, providing on its face a picture of a vibrant economy.

However, when looked at for the first half, GDP averaged only about 1.2% growth, with consumer spending barely up 1%. The primary reason for the big jump in Q2 was a reversal in the import surge during the first quarter as companies sought to get ahead of tariffs. In the first quarter, growth fell 0.5% amid the swell in imports, which subtract from the GDP calculation.

If the July unemployment report portends what’s to come, the picture is bound to get gloomier.

“The most likely outcome is still weaker economic growth in the second half of 2025 and early 2026 compared to 2024 and the first half of this year, but no recession,” Gus Faucher, chief economist at PNC, wrote following the jobs release Friday.

“But given the revised read on the labor market, recession risks are elevated, and higher tariffs make that risk even higher,” he added. “It is easy to see how very weak job growth and higher tariffs could cause consumers to cut back on their spending and businesses to cut back on their investment, pushing the economy into a recession.”

Goldman Sachs forecasts growth to be just 1% in the final two quarters due in part to slower consumer spending and “a sharp slowdown in real income growth that reflects weaker job growth, higher tariff-driven inflation, and reductions in transfer payments in [the fourth quarter] that were included in the recent fiscal bill.”

“Friday’s payrolls report brings payroll growth closer in line with big data indicators of job gains and the broader growth dataset, both of which have slowed significantly in recent months. Taken together, the economic data confirm our view that the US economy is growing at a below-potential pace,” the firm said in a note over the weekend.

Despite the cloudy outlook, White House officials insist the economy is sound and will only get better once President Donald Trump’s One Big Beautiful Bill Act kicks in.

Trump himself pushed back hard against the July jobs report, firing Bureau of Labor Statistics Commissioner Erika McEntarfer on Friday as he called the numbers “FAKED” and “RIGGED” in a Truth Social post.

However, White House economist Kevin Hassett on Monday told CNBC the revisions were concerning even as he also touted broader economic strength.

“There are a lot of really good reasons to be super optimistic about second half of the year. But absolutely that jobs number, if the revision turns out to be true, does suggest that there’s less momentum than we thought,” said Hassett, the director of the National Economic Council who is thought to be a leading contender for a vacant seat on the Federal Reserve Board of Governors.

Trump administration officials have been calling on the Fed to cut its benchmark funds level that feeds into multiple other consumer interest rates. The Fed last week held the rate steady, and several officials made public comments since the report saying they still…