US Economy and the Market

US Economy and the Market

In 2025, the mainstream Keynesian narrative that the United States would inevitably experience a recession and stagflation has proven to be utterly incorrect. The U.S. economy is performing much better than those of comparable nations, is showing broad-based strength, and even has indications of accelerating growth, giving investors and consumers plenty of reason to feel more optimistic, despite the “consensus” estimates from earlier in the year.

The consensus was wrong.

The U.S. economy is outperforming the UK, German, French, Italian and Japanese economies, as well as the entire euro area, with estimates of economic growth that surpass the best economies in developed nations and with much lower unemployment as well as solid real wage growth.

The United States labour market lost 23,000 jobs in July, with major declines across several sectors, including education, government and retail trade.

On Friday, the Bureau of Labor Statistics released its latest jobs report, which showed that the unemployment rate fell to 4.1 percent from 4.2 percent.

Part of that dip, however, was driven by a decline in labour force participation, the percentage of people working or actively looking for work.

Labour force participation fell to 61.4 percent, its lowest level in five years. Excluding the economic impacts of the COVID-19 pandemic, the labour force participation rate is at its lowest level in five decades.

Some 264,000 people left the labour force, meaning they are no longer working or looking for work.

The retail trade sector lost 19,000 jobs overall. Warehouse clubs and big-box retailers were hit the hardest, shedding 21,000 jobs, while petrol stations cut another 5,000. Those losses were partly offset by gains at stores selling more specialised goods, such as music and sporting goods stores, which added 10,000 jobs.

During the height of the normally busy summer travel season, the US economy also lost jobs in leisure and hospitality. The sector shed 40,000 jobs, with food services accounting for 26,000 of those losses.

The biggest losses came in government, which shed 53,000 jobs overall. Most of those cuts were in local education, which lost 49,000 jobs.

There were gains in healthcare, with the sector adding 22,000 jobs. Most of those gains were concentrated in ambulatory healthcare services, which added 18,000 jobs.

The latest jobs report comes amid a so-called “low-hire, low-fire” environment, which essentially means that people who have jobs are not leaving them in large numbers to take new positions.

The number of job openings dropped slightly from 7.5 million to 7.4 million in May, while hiring remained unchanged at 5.3 million, according to the Job Openings and Labor Turnover Summary report from the Bureau of Labor Statistics published on Tuesday.

Experts say the recent reports suggest an economic slump, contributing to low confidence among American consumers.

“There’s no sugar coating the overarching message in the July jobs report – the economy is struggling,” Mark Zandi, the chief economist at Moody’s Analytics, a financial services firm, wrote on social media.

Zandi pointed to the slumping labour force participation rate as a “clear tell” of an ailing job market.

“While unemployment is low, that’s only because those losing their jobs are leaving the workforce, too discouraged to look for a job, as few businesses are hiring,” he explained.

With wage growth being outpaced by the pace of inflation, Zandi added, “no wonder most Americans say they are upset about their finances and the economy’s performance”.

Friday’s jobs report is also affecting expectations for the interest rates set by the Federal Reserve. Increasingly, experts expect the US central bank to hold interest rates steady at its next policy meeting in September.

CME’s FedWatch tool, which tracks the likelihood of monetary policy decisions, now forecasts a 56 percent chance that rates will remain unchanged, up from 45 percent on Thursday.

Last month, the Federal Reserve maintained its benchmark interest rate at 3.50 to 3.75 percent.

Despite the jobs data, US markets are on the upswing. The Nasdaq is up 0.9 percent, while the S&P 500 is 0.5 percent higher than at the market open. The Dow Jones Industrial Average is up 0.3 percent in midday trading.

The price of gold, which is typically considered a safe-haven investment during times of economic uncertainty, is up 2.2 percent at $4,336.09 an ounce.

Because of exaggerated expectations of the impact of factors such as new tariffs, global uncertainty, and the potential for persistently high inflation, most mainstream analysts and market commentators projected a stagnant or recessionary environment for the United States in 2025, while hailing the euro area as the place to invest. We have seen the opposite.

U.S. bond yields are falling, while euro area sovereign yields are rising despite European Central Bank rate cuts. Additionally, euro area gross domestic product (GDP) growth estimates are weak, and U.S. economic growth is stronger than the European Union’s “engines of growth,” whereas Japan and the UK remain stagnant. Inflation is under control, real wage growth is strong, and the private sector is improving.

The mainstream consensus predictions were biased and incorrect. Rather, the U.S. economy has reported strong real GDP growth: Following a short contraction in Q1, growth in the second quarter bounced back to 3 to 3.3 percent annually, and the Atlanta Fed’s GDPNow model currently projects Q3 growth at a 3.8 percent pace. In addition to consumer spending and imports, business investment contributed to this GDP strength, and, more importantly, it came with government spending under control.

The most recent consumer price index (CPI) and producer price index data dispel concerns that the tariff regime is causing inflation. CPI and core measures in August came in close to or below expectations, indicating that headline monthly inflation and producer price increases are still under control. Prices for durable and nondurable goods are still stable, and despite negative forecasts, tariffs have not generated a significant increase in the cost of living for Americans; instead, energy and important imports have either decreased or stabilized.

Despite recent revisions, the private-sector labor market maintained momentum from January through August. The enormous negative revisions were concentrated in the January to December 2024 period, showing that the Biden administration’s job creation was half the reported figure and needed a 2 million negative revision of the 2023 to 2024 job figures. What the Bureau of Labor Statistics has shown clearly is that the United States was in a private sector recession in 2024, which justified the negative sentiment from citizens.

Private payrolls have reported consistent net gains, particularly in the important service and construction segments, despite slight revisions to previous months. Even more encouraging is the fact that real wage growth is accelerating rather than merely keeping up with inflation. Real average hourly earnings increased by 1.2 percent, and real weekly earnings increased by 1.4 percent between July 2024 and July 2025. Increased purchasing power is boosting middle-class disposable income and driving retail demand because wage gains are outpacing price growth.

Retail sales also remain resilient in the face of market volatility and trade uncertainty. Bloomberg predicted that headline retail sales would increase by 0.2 percent in August, while the core control group would increase by 0.4 percent. The actual numbers came in at 0.6 percent and 0.7 percent, respectively. This increase is significantly better than what April estimates showed, particularly since consumer sentiment is still cautious but generally stable. Throughout the third quarter, household consumption is rising because of strong private labor markets and healthy wage growth.

The growing agreement that inflation risks are under control represents the most significant development for financial markets, paving the way for the Federal Reserve to finally recognize reality and cut interest rates in the upcoming months. Markets are beginning to anticipate that the Fed will soon lower interest rates, which could further boost borrowing, investment, and the economy’s momentum for the rest of 2025.

The pessimistic predictions of recession and stagflation have proven to be undeniably wrong. The U.S. economy is in a period of true private sector expansion, thanks to strong job and wage growth, favorable taxation, and deregulation, while tariffs are having no real impact on inflation. Now the Fed needs to be truly data dependent. Putting aside the pessimism of the previous year, the data currently indicate an improving outlook and a recovery from the private sector recession and fiscal mess inherited in 2026.

A summer hiring slump dogged the US labor market in July as the economy unexpectedly lost 23,000 jobs, according to new data released Friday by the Bureau of Labor Statistics.

The unemployment rate dropped to 4.1% from 4.2% as more people left the labor force.

July’s job gains marked a sharp slowdown from June’s total, which was downwardly revised to 20,000 from 57,000. Following revisions, the jobs created in May were essentially halved, dropping to 66,000 from 129,000. Workers’ pay gains slowed to a five-year low.

The July report fell far short of economists’ expectations for a 95,000-job gain.

It’s always cautioned that one month does not make a trend, and initial economic data snapshots are rarely that clean cut – especially post-pandemic and especially during periods of high uncertainty.

However, when accounting for the nuance in July’s report (more on that below) and putting it in the context of recent months’ data, the labor market remains low-momentum, uneven and one where pay growth can’t keep up with faster-rising prices.

“This was a bleak report, and it signals the labor market is stalling again,” Heather Long, chief economist at Navy Federal Credit Union, told CNN. “You can explain away a few things for July and a few things for June; but if you step back and look at the bigger picture, the past three months have seen 20,000 average job gains – no matter how you look at it, that’s anemic.”

Friday’s report adds to signs that employers are becoming more cautious about hiring as they navigate growing headwinds, which include an aging population, the rapid adoption of AI, higher oil prices, policy uncertainty and the war with Iran.

“Price volatility may be contributing to increased hesitation from employers,” Nicole Bachaud, labor economist at ZipRecruiter, wrote in a note Friday. “With job opportunities remaining scarce, more workers are exiting the labor market entirely.”

The hiring that is happening also isn’t broad-based, with the bulk coming from just one sector: healthcare and social assistance. That was the case again last month, when that sector added an estimated 22,600 jobs.

“Healthcare has just been a printing press of jobs,” Tom Porcelli, chief economist at Wells Fargo, told CNN in an interview. “But if you strip that out from private (employment, which was up 30,000 jobs in July), the cyclical hiring was only +7,000 jobs. The backdrop is still incredibly uneven.”

Behind healthcare, other sectors that added jobs included construction and areas within manufacturing – industries that have benefited from the AI capital expenditure and data center boom. Sectors such as professional and business services (+18,000) and the tech-dominant information (+11,000) also added jobs.

However, those gains were wiped away by outsized losses in local government (specifically, local schools) and leisure and hospitality.

However, in June and July, leisure and hospitality shed 43,000 jobs and 40,000 jobs, respectively, BLS data shows.

“It’s difficult for me to believe that we’ve lost 83,000 jobs over the last two months in leisure and hospitality services, given that the World Cup has been going on,” Gus Faucher, chief economist at The PNC Financial Services Group, said in an interview. “But that’s a very seasonal industry where we tend to see more hiring during the summer, and it could be that seasonal adjustment factors are off for some reason and are not picking up what’s truly reflected in the labor market.”

Faucher is referring to the statistical practice aimed at smoothing out time-of-year patterns to better see underlying trends. However, that methodology comes with some quirks: For example, if hiring activity doesn’t sync with historical norms (such as boosts to summer hiring at restaurants and hotels), that can come across as job losses.

The 57,000-job decline in the local government sector, specifically the 49,600 jobs from local school districts, is best read as “an artifact of seasonal adjustments rather than a genuine loss of jobs,” wrote Jason Pride, chief of investment strategy and research at Glenmede.

“A summer release (of district workers) running about 5% larger than the historical norm produces a 50,000-job adjusted decline out of a million-job gross swing,” he wrote in a note Friday. “Distortions of this kind typically reverse as districts staff up for the new school year.”

In addition to those seasonal adjustment quirks, shifts in hiring patterns are also likely contributing to volatility, ADP’s chief economist Nela Richardson said earlier this week. High levels of macroeconomic uncertainty have resulted in hiring coming in fits and starts.

Also, because of larger structural shifts (notably an aging population and a slowdown in immigration), the economy doesn’t need to add as many jobs as it once did.

However, even accounting for the “funky stuff” possibly going on with the back-end seasonal adjustments, there’s still a clear trend that outside of healthcare, hiring across most industries is stalling, Long said.

‘Americans feel stuck’

It’s a labor market that’s working for some but not for all. Wage growth stalled in July as average hourly earnings rose just 0.1% from June, dropping the annual rate to 3.2%, a five-year low. Workers’ paychecks, on average, are being entirely eaten away by inflation, which measured 3.5% in the latest Consumer Price Index.

“You don’t need a PhD in economics to see that the financial squeeze is real for Americans right now, and I think the second half of this year will be belt-tightening for many families,” Long said.

The current job market is not supportive of demand-driven inflation, he said. And given that many issues with inflation are coming from the supply-side right now, the likely course of action means the Fed will stay on hold, he added.

US stocks ticked up Friday after the report and Treasury yields fell as the odds for a Fed rate hike at the September meeting fell to 40%, down from 55% one day ago, according to CME FedWatch.

The latest inflation data will come out next week, starting with the Consumer Price Index on Wednesday morning. Lower gas prices, which were down on average compared to June, likely helped to keep inflation tame at 3.4%, down slightly from 3.5%, EY-Parthenon economists wrote in a note Friday.

But inflation at 3.4%, a recent stretch of tepid job growth and a still incredibly uncertain economic environment likely won’t bring much solace to Americans and their affordability concerns, Navy Federal’s Long said.

“Americans feel stuck right now,” she said. “You’re not going to move with the mortgage rate at almost 7%. You’re not going to get a new job with hiring this anemic. People are holding on to their cars longer; they’re even holding on to their cell phones longer.”

Posted on 2026/08/08 09:41 AM