The US Federal Reserve’s dual mandate – to balance inflation targeting and maximum employment – means that every shift in labour market data is closely watched for clues about the future path of interest rates. At first blush, the latest job report might appear to suggest the Fed is gearing up to ease rates. However, we believe the broader employment picture will lead the Fed to take a more cautious approach.
Non-farm payrolls rose by just 73,000 in July, well below the consensus estimate of 110,000. More importantly, revisions to May and June cut the cumulative gain for those two months by 258,000 jobs, bringing the average monthly job gain for the last three months to just 35,000. Should we believe these numbers?
While the recent downward revisions were larger than normal, there is no evidence to suggest the data was manipulated for political purposes.
Estimating the seasonally adjusted change in payroll employment is inherently difficult for several reasons. One major challenge is that seasonal patterns have been highly unstable since the pandemic. Even minor shifts in seasonal behavior, or a difference of just a day or two in the timing of the survey week, can significantly affect seasonally-adjusted data.
Another issue is the declining response rate to the payroll survey. Before the pandemic, well over 60 per of companies participated. This year, the rate has dropped to less than 43 per cent. Response rates from government and small businesses are particularly low and slow, leading to major revisions and wreaking havoc on the seasonal adjustments.
ADP, a major payroll processor, publishes its own monthly estimate of job growth based on data from processing paycheques for more than 25 million private sector workers. This data is good at confirming broader employment trends. So far this year, ADP estimates that total private sector employment has grown by an average of 84,000 jobs per month, compared to 144,000 per month in 2024.
The recent slowdown in economic growth also points to weaker hiring ahead. Although headline GDP figures have been very volatile due to swings in international trade and inventories, real domestic final demand has clearly decelerated. Since economic growth typically leads job growth by one to three quarters, this suggests a slowdown in the demand for workers both now and in the months ahead.
At the same time, there is a clear shortage of labour supply. The workforce is aging. According to 2023 Census projections, if net immigration were to drop to zero, the population aged 18 to 64 would fall by over 300,000 people in the year ending in July 2026, and continue to fall at roughly that pace through 2030.
The labour force participation rate – the percentage of the population aged 16 and over that is working or actively looking for a job – has declined from 62.65 per cent in July 2024 to 62.22 per cent in July 2025, shrinking the workforce by almost 1.2 million people. Roughly half of this decline is due to a greater portion of the population entering their retirement years. However, over the past year, the labour force participation rate has also fallen among those aged 18 to 54.
This may well reflect changes in immigration policies, as many immigrants appear to be leaving the labour force. In July, while the labour force participation rate for native-born workers fell by 0.3 per cent from a year earlier, it declined by 1.2 per cent for foreign-born workers.
The John Burn Research and Consulting Group has tracked a substantial drop in remittance payments in June, suggesting that around 2 million fewer immigrant workers are sending money home to their families. Western Union noted this trend during their most recent earnings call.
This employment decline will likely be felt in the construction, leisure and hospitality, manufacturing sectors like meat processing and retail, and a host of other industries.
All of this suggests the labour market is facing not only slowing growth in demand but also a sharp squeeze on supply. Small businesses, in particular, report significant challenges with both the quality and availability of job applicants.
Adding to this pressure, federal government employment is expected to fall more sharply in October as the 76,000 federal workers who took buyouts in the spring fall off government employment rolls.
Combined with the dampening effect of tariffs on economic activity, these developments point to some weak months for job growth in the second half of 2025. The tight labour supply is likely the reason we won’t see a significant rise in the unemployment rate.
While tariff-driven inflation is probably temporary, these tariffs, together with the sharp decline in labour supply and expansionary fiscal policy, could sustain above-trend inflation well into 2026.
The economy will grow more slowly, and because its potential output has declined, the pace of growth required to avoid inflation is also slower. For the Federal Reserve, this signals caution when considering lowering interest rates.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
The federal government says it wants to be a housing developer. But is that really where its strengths lie?
In our latest Housing Affordability Watch, we explore why Ottawa should stick to its core competencies – and what that could mean for the future of affordable housing in Canada.
Read it here: Stick to Your Knitting: Why Government Should Focus on Its Core Competencies in Housing
Independent Opinion
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