The following article was published by WTW

The July U.S. labor market report released on August 1 showed signs of a weakening labor market, especially in more cyclical sectors. The key points were:

• Nonfarm payroll growth for July was well below expectations, rising by only +73K compared to a consensus of +115K
• May and June payroll growth was revised down heavily, reducing cumulative job gains over the last three months by 258K
• Despite weaker employment growth, the unemployment rate increased only slightly – rising to 4.2% from 4.1% in June. This is primarily because the U.S. labor force participation rate – the proportion of the U.S. working-age population either in work or actively seeking work – has also been falling in recent months

The slowdown in hiring by U.S. companies is consistent with a weakening of other recent U.S. economic datapoints, e.g., slower consumer spending and businesses drawing down their inventories more quickly. This suggests the overall U.S. economy is slowing. It also means that the very strong GDP growth rate in the second quarter (+3% at an annualized rate) is already out of date – GDP is normally a lagging measure of activity anyway.

Switching to trade, the U.S. administration has issued a revised list of country-specific tariff rates, targeting most of the trading partners that it had not yet reached a deal with. Much remains unknown, given the deals announced so far lack the full details, making it difficult to gauge their longevity and impact. One thing is clear, it will result in higher U.S. inflation as we go through the rest of 2025, which will squeeze real incomes and spending, and reinforce the slowdown in U.S. GDP growth.

On balance, the stronger indication of slowing U.S. growth in the data, and our unchanged view of the likely peak level of U.S. core inflation (3% – 3.5%), mean it is more likely that the Federal Reserve will cut U.S. interest rates in September. Whether the Fed cuts or waits for more material signs of labor market weakness, such as rising unemployment, and/or signs of core inflation coming down, is finely balanced.

Looking into 2026, the U.S. government agreed on its 2025 U.S. Budget Reconciliation Bill, which extends a significant set of tax cuts for households and businesses, implements new tax cuts, increases government spending in defense and border security, and reduces spending on Medicaid and other areas. Overall, the positive effects on U.S. economic growth from the government’s fiscal package should offset the drag on growth from higher trade tariffs in 2026. Therefore, while we expect U.S. and global real GDP growth to slow moderately over the next six months, it is likely to reaccelerate in 2026 – a supportive environment for financial assets over the next 18 months in our view.

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