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(Bloomberg) — Last week’s economic data caught up with the kind of economy that company executives and consumers have long described this year: flashing some warning signs.
Employment numbers released Friday painted a much weaker picture of the labor market than previously reported. Inflation-adjusted consumer spending — which accounts for about two-thirds of US economic activity — fell in the first half of the year, while the Federal Reserve’s preferred price gauge picked up in June.
The US economy is “struggling to maintain its footing,” said Sarah House, a senior economist at Wells Fargo & Co.
“Businesses and consumers have been facing a whirlwind of economic policy changes, elevated inflation and monetary policy that remains somewhat restrictive,” she said. “The loss of momentum feared by this mix is unfortunately beginning to bear out.”
The employment data out Friday, including revisions that shaved off nearly 260,000 jobs from the May and June figures, jolted markets and upended the perception that the labor market had been solid heading into summer. Employment growth averaged just 35,000 over the past three months — the worst since the pandemic.
The Bureau of Labor Statistics report called into question the Fed’s decision to hold interest rates just a few days earlier. It also got caught in the political maelstrom after its publication, with President Donald Trump telling officials to fire the BLS commissioner — and reiterating his call on the Fed and Chair Jerome Powell to lower rates.
Then later Friday came the surprise announcement that Fed Governor Adriana Kugler will resign from her role, offering Trump a sooner-than-anticipated opportunity to install a policymaker that aligns with that vision.
Many firms have put investment and hiring on ice as they try to figure out what the impact from Trump’s economic policies — chief of them tariffs — will be. The housing market just experienced its worst spring season in 13 years. And consumers, facing mounting debt, have cut back on non-essential items.
“This struggle is likely to continue as prices rise and businesses and consumers find it more and more difficult to spend and invest,” said Gregory Daco, chief economist at EY-Parthenon.
That said, the US economy is expected to continue to plow ahead, albeit at a slower pace than in years past. Forecasters anticipate the economy to grow 1.5% this year and 1.7% in 2026, based on the latest survey conducted by Bloomberg News.
At Grata Thai Cuisine in Midtown Manhattan, owner Philip Sirikuptamas sees the slowdown first-hand. He is dealing with the double blow of higher prices and fewer consumers coming into his restaurant. The costs of imported products like coconut milk have gone up substantially, he said, while chicken prices have almost tripled. At the same time, he’s wary of raising prices and scaring away consumers.
“The customers spend less because they are struggling to make money,” said Sirikuptamas, 66. “Same as we are.”
Consumers Pull Back
Companies from Chipotle Mexican Grill Inc. to Procter & Gamble Co. have noted the economic uncertainty is weighing on demand.
“We see consumption trends consistently decelerating, not significantly, but we see a deceleration in the US,” P&G Chief Financial Officer Andre Schulten said during the company’s quarterly earnings call. “The volatility the consumer is seeing, I think is maybe not necessarily grounded in their current reality, but more on what to expect for the future.”
At the same time, June data showed a pickup in prices of goods that are often imported — like furniture and appliances — an indication that some companies are starting to pass the cost of higher duties onto consumers.
Even after the Trump administration reached trade deals with key partners, tariffs announced last week will boost the average US rate on goods from across the world. Many economists expect import levies to push up prices in the coming months.
Fed officials, who have a dual mandate of taming inflation and keeping unemployment low, now face even more pressure to lower interest rates before the economy cools too much.
Chair Powell pointed to downside risks in the labor market at his press briefing on Wednesday, while still characterizing it as “solid.” He also nodded at the slowdown in spending.
“Consumer spending had been very, very strong for the last couple of years and had — repeatedly, forecasters, not just us, had been forecasting it would slow down,” Powell said. “Now maybe it finally has.”
The housing market, constrained by high prices and elevated borrowing costs, continues to be a drag on economic growth. Combined outlays for homebuilding and nonresidential projects dropped 2.9% in June from a year ago, one of the worst annual declines since early 2019.
Massive Revisions
Revisions to government data like payrolls are routine, and they don’t usually catch much attention. But the size of Friday’s revisions, which showed 258,000 fewer jobs were added in May and June than previously thought, transformed the job market picture from solid to near-stalling.
Two-year Treasury bonds – which are tightly linked to short-term Fed rates – soared following the data, while the S&P 500 slumped.
“When corporations are nervous around the future, they tighten their belts. And the first place they tighten their belts is on hiring,” Mark Begor, chief executive officer of Equifax Inc., said on a July 22 earnings call.
Despite the slowdown in hiring, most businesses have refrained from layoffs. The July unemployment rate remained relatively low even after ticking up to 4.2%. That said, the figures underscore the increasing struggle for out-of-work people.
Scar Winter Kelsey, a 30-year-old data analyst, has been actively looking for employment since March, without any luck.
“I was looking up unemployment statistics the other day, actually, and I was surprised — I believe last time I saw the number was at 4%,” said Kelsey, who previously researched LGBTQ issues at Northwestern University for more than four years.
“Everyone I talk to is either without a job or lucky that they have a job and worry that they are going to be on the chopping block tomorrow,” Kelsey said.
–With assistance from Maria Eloisa Capurro, Nazmul Ahasan, Jarrell Dillard, Alex Newman, Mark Niquette and Vince Golle.
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