Labor Momentum Builds in July, But the Hiring Gap Persists

Labor Momentum Builds in July, But the Hiring Gap Persists

• Services and manufacturing surveys show hiring improved this month.
• Yet, labor gains this year continue to fall behind pace.
• The broader slowdown will increase pressure on the Fed to cut rates.

July appears to be flexing its seasonal hiring strength — but with the annual pace still lagging, a dovish Fed tilt looks increasingly justified…

This week brings a key update related to the economic growth outlook. On Friday, the U.S. Bureau of Labor Statistics (BLS) releases its payroll data for July. Wall Street is expecting an increase of 100,000 jobs. If that proves correct, it will be a far cry from the typical July increase of 318,000 employees since 2015. It would also cement 2025 as one of the worst for hiring in the last decade, outside of the pandemic lockdowns in 2020…

This year is already off to a rough start, based on data through June. Businesses have added roughly 782,000 new employees in the first half of the year—compared to an average gain of 1,603,000 since 2015. That means we’re more than 800,000 hires behind the typical pace. In other words, job gains in the second half of the year would need to be exceptionally strong just to reach a “normal” annual total.

As the chart above shows, July is usually the second strongest month for hiring behind February. Based on recent Federal Reserve business surveys, hiring rebounded this month. While the numbers aren't stellar, they appear to be rebounding closer to levels from late 2024, when job trends were stronger. If the national numbers confirm that, it will imply the economic momentum is stabilizing.

Now, such an outcome would go counter to the worst-case tariff scenario. However, given how far we’re lagging the typical hiring pace, the data should still bolster the case for additional interest rate cuts from the Federal Reserve later this year - supporting a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Every month, several regional Fed banks reach out to manufacturing and services companies in their districts. They ask those businesses about the level of activity they’re seeing to gauge whether commerce has improved, worsened, or stayed the same.

I follow the results from the Dallas, Kansas City, New York, and Philadelphia Fed banks. Together, these four districts account for roughly 25% of national gross domestic product. I focus on the employment and inflation components of the data. By analyzing the results, we can get an early read on national trends—especially since this data is released just before month-end, ahead of market-moving reports like those from the BLS.

Today, we’re focusing on employment. Let’s break down the individual components before looking at the broader picture.

Starting with the manufacturing surveys…

The chart above shows the hiring trend in the sector since early 2019. After the pandemic collapse, factory hiring surged. But since then, the numbers have gradually eased. On the right side of the chart, you’ll notice that since peaking in January, manufacturing employment has been declining. However, over the last few months, the situation has improved with what appears to be surges in May and July. This could be the removal of uncertainty with framework trade deal announcements.

Now let’s turn to the services sector…

The chart above shows that services-sector hiring also rebounded in July. The index remained in positive territory for the third straight month. We haven’t seen such an outcome since the end of 2024. Again, this could be the result of trade deal announcements removing uncertainty.

To get a clearer national picture, I combined the two data sets into a single chart. Based on the domestic employment breakdown, I weighted the services data at 80% and manufacturing at 20%...

In the chart above, I used a three-month rolling average to smooth out volatility and better capture the trend. As you can see, the combined Fed survey data has historically led national hiring trends. The three-month average rose in December—just ahead of a strong nonfarm payrolls report. But it rolled over at the start of this year. In July, the three-month average continued the rebound we’ve experienced over the last three months. That’s noteworthy, as hiring in the second quarter bucked the trend by outpacing the first quarter

Bottom line, manufacturing and services employment appear to have picked up. If the BLS confirms this trend later this week, it will mean the hiring outlook is improving.

So, if we get decent data on Thursday, don’t be surprised if Wall Street cheers the news. However, even with a strong result, the year-to-date trend would still be way behind pace. Fed officials like Chair Powell and Governor Christopher Waller have signaled they’re open to easing policy if employment falters. And based on the broader picture, there appears to be a need for support. That would likely push borrowing costs lower and support a continued rally in the S&P 500.

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