Weak Job Numbers Contain Some Good News

On August 4, 2025, the Bureau of Labor Statistics reported that 73,000 payrolls were created. More importantly May's job gains were revised down from 144,000 to 19,000 and June's gains were revised down from 147,000 to 14,000. That means the three-month average of monthly payroll gains has fallen sharply to 35,000.

In addition, the unemployment ticked up from 4.1% to 4.2%. As you can see in the chart below, 35,000 is a new cycle low and very much consistent with the start of prior recessions. Going back to the 1940s, the average three-month gain in nonfarm payrolls at the start of a recession is 96,000—we are now well below that.

The downward revisions came after the July 30, 2025 report showing that GDP grew 3.0% in the second quarter—versus a decline of 0.5% in the first quarter.

The Productivity Silver Lining

However, these employment figures should be viewed alongside recent GDP data. The economy expanded at a solid pace, 3.0%, in the second quarter, despite the moderation in job growth. This divergence points to an encouraging trend: rising productivity, perhaps driven by advancement in the usage of artificial intelligence.

When economic output grows faster than employment, it signals that workers are becoming more efficient and productive. This productivity growth is significant for several reasons:

Federal Reserve Flexibility: Higher productivity gives the Fed more room to maneuver on interest rates. If the economy can grow without generating excessive inflationary pressure from tight labor markets, policymakers have greater latitude to support growth through monetary policy.

Market Implications: Both stock and bond markets typically respond favorably to productivity gains, as they suggest sustainable economic growth without the inflationary pressures that come from labor shortages.

Wage Growth Potential: In a productivity-driven economy, workers can see real wage increases even in a more balanced labor market.

Understanding the Labor Market Dynamics

The current employment landscape reflects several intersecting factors. Changes in immigration policy have affected labor force growth, creating tighter conditions in some sectors. Meanwhile, technological advancement and business efficiency improvements are allowing companies to maintain output with more measured hiring.

This combination creates a complex scenario where traditional employment metrics may not tell the complete story of economic health.

Two Perspectives, One Reality

The current data offers ammunition for both optimists and pessimists:

The optimistic view focuses on productivity gains, sustainable growth, and the potential for continued economic expansion without overheating. Strong GDP growth alongside moderate employment gains suggests a maturing, efficient economy. In addition, stronger GDP growth, fueled by higher productivity, can help prevent the US’s debt-to-GDP ratio from rising—addressing another investor concern.

The cautionary view emphasizes the employment slowdown and its potential implications for consumer spending and economic momentum. Historically, sharp decelerations in job growth have preceded economic downturns.

Takeaways

The coming months will reveal whether we're witnessing a healthy economic rebalancing or the early stages of a more significant economic slowdown. What's clear is that this economic cycle is demonstrating the complex interplay between employment, productivity, and growth in ways that challenge traditional interpretations.

What's your take on these mixed signals? Are you more convinced by the productivity story or concerned about the employment trends?