Is US economy nearing recession? July jobs report shows rise in unemployment rate

US job growth slowed sharply in July 2025, with unemployment rising to 4.2 per cent and past job gains revised down, fuelling recession fears and pressuring the Fed to consider cutting interest rates.

In Short

• May and June job gains were drastically revised down by 258,000
• Unemployment rate rose to 4.2 per cent
• Trump's tariffs raised costs, pressuring hiring and wages

US job growth in July 2025 fell short of expectations, delivering a sharp blow to economists and unsettling financial markets. According to a closely watched Labor Department report released on Friday and cited by Reuters, nonfarm payrolls added just 73,000 jobs last month, well below expectations, while employment gains from May and June were revised downward by a staggering 258,000.

The unemployment rate also ticked up to 4.2 per cent from 4.1 per cent, signalling that the once-resilient labor market may finally be cracking under pressure.

Labor market strength had been a main support for the U.S. economy, helping it hold up against high inflation and tough policies from the Trump administration, such as new tariffs and strict immigration measures.

But the latest Bureau of Labor Statistics (BLS) data paints a troubling picture of a cooling job market, raising the specter of a looming recession.

Perhaps the most startling revelation in the report wasn't July's weak job creation alone, but the massive downward revisions to previous months.

May's job gains were cut from 144,000 to just 19,000, and June's numbers were slashed from 147,000 to a paltry 14,000.

Hiring Freeze Signals Broader Slowdown

The three-month average for job gains has now dropped to just 35,000, a sharp drop from monthly averages exceeding 240,000 in 2024.

Sectors like retail, tech, and manufacturing are reporting either stagnant hiring or outright layoffs. Wage growth is also slowing, job openings are declining, and the unemployment uptick marks a critical turning point for analysts who had seen labor data as a key measure of economic resilience.

“This is the slowdown we’ve been bracing for,” said Luke Tilley, chief economist at Wilmington Trust. “Firms are adjusting to a very different cost structure and holding off on hiring.”

Trump’s Tariffs: A Major Obstacle to Growth

President Donald Trump's sweeping 2025 tariff agenda is emerging as a key factor weighing down job creation. The average US tariff rate has surged to between 18 per cent and 21per cent, the highest in over a century.

According to the Penn Wharton Budget Model, the long-run effect could be a 6 per cen reduction in GDP and a 5 per cen decline in real wages. Middle-income households may lose an estimated USD 22,000 in lifetime earnings.

The Tax Foundation compares the tariffs to a stealth tax hike, estimating they could shrink 2025 GDP by 0.8% and cost households between $1,200 and $1,600 this year alone. Higher input costs—up 2% to 4.5% in some sectors—are pressuring businesses to scale back hiring or cut jobs entirely.

Fed Under Pressure to Pivot

With inflation still stuck between 2.6 per cent and 2.8 per cent, the Federal Reserve has been trying to strike a careful balance. But the sudden slowdown in the job market may push it to act.

According to CME Group data, investors now see a 75.5 per cent chance the Fed will cut interest rates in September—up from just 40 per cent the day before the jobs report came out.

The central bank had been using strong employment numbers to justify holding rates steady. Now, the dramatic slowdown in hiring may compel policymakers to act to prevent a deeper economic contraction.

Not all sectors fared equally. Healthcare, construction, and government continued to post modest job gains, but at a slower pace. Meanwhile, tech, retail, and manufacturing either stagnated or saw declines in hiring.

A Turning Point for the Economy?

The July jobs report may mark the moment when a soft landing slipped out of reach. With hiring slowing, jobless claims ticking upward, and consumer spending dampened by inflation and higher costs due to tariffs, many economists believe the second half of 2025 could see the US slipping closer to, or even into a recession.

“This report is a gamechanger,” said Heather Long, chief economist at Navy Federal Credit Union, via CNBC. “The labor market is deteriorating quickly.”

- Ends