Trend overview

The July 2025 U.S. employment report showed that non‑farm payrolls barely increased, rising by 73,000 jobs, and that the unemployment rate remained at 4.2 % [1]. Revised data cut 258,000 jobs from May and June payrolls [1]. Professional services, manufacturing and wholesale trade lost jobs, while health‑care and social assistance continued to hire [1]. The Bureau of Labor Statistics noted that labour‑force participation declined over the past year and that long‑term unemployment increased to 1.8 million people [1].

These figures were released only days after the Federal Reserve kept its policy rate in the 4.25 %–4.50 % range and Chair Jerome Powell signalled caution about cutting rates, citing the need to assess how new U.S. tariffs will affect inflation [2]. Two of the Fed’s voting members dissented, preferring an immediate rate cut [2]. Markets that had priced in a September cut reduced that probability to below 50 % [2]. The Fed argued that rising tariffs imposed by President Donald Trump could increase inflation and therefore require keeping rates “modestly restrictive” for longer [2].

Medium‑term implications

Cooling labour market and inflation trade‑off. With payrolls almost flat and unemployment edging higher, labour‑market slack is increasing [3]. Consumer spending and domestic demand have already slowed, and business investment in equipment cooled sharply in the second quarter [3]. Continued job weakness would ordinarily prompt the Fed to ease policy. However, the administration’s sweeping tariffs have raised the effective tariff rate to 17.3 %, according to the International Monetary Fund [4]. These tariffs are feeding into prices and could keep inflation above the Fed’s 2 % target well into 2026 [4]. The Fed therefore faces a delicate balance: it may start cutting rates later this year if unemployment rises further, but aggressive easing is unlikely while tariffs support inflation.

Forecast (6–18 months). Given the weak payroll trend and rising long‑term unemployment, U.S. job growth is likely to remain tepid through early 2026. Unemployment could drift towards 4.5 % by mid‑2026 as companies adjust to higher import costs and slower demand. The Fed is likely to deliver its first rate cut at the December meeting and proceed cautiously in 2026, trimming the policy rate by around 50 basis points over the year unless inflation accelerates. Tariffs will keep inflation elevated, so significant easing is improbable before the second half of 2026.

Global spill‑overs. A later start to U.S. rate cuts means continued support for the dollar and higher global borrowing costs. Eurozone inflation remains at the 2 % target, and markets see less than a 50 % chance of further European Central Bank cuts [5]. Japan’s central bank has held rates at 0.5 % but raised its inflation forecasts and hinted at a possible hike later this year [6]. Emerging markets therefore cannot rely on cheaper U.S. funding and may face capital outflows. Canada’s manufacturing sector is already contracting under the weight of tariffs; its purchasing managers’ index (PMI) sat at 46.1 in July, marking a sixth straight month of decline [7]. Prolonged U.S. labour‑market weakness and high tariffs could depress cross‑border trade, intensifying headwinds for export‑oriented economies.

Conclusion

The July employment report signals that the U.S. labour market is losing momentum as tariffs and policy uncertainty squeeze businesses. While the Fed remains reluctant to cut rates because of elevated inflation, continuing job weakness is likely to force some easing by late 2025 or early 2026. Medium‑term forecasts point to modest growth and a higher unemployment rate as the economy digests tariff‑related price pressures. Global markets should prepare for a period of uneven growth, persistent inflation and cautious central‑bank policy.

Footnotes

[1] U.S. Bureau of Labor Statistics – Employment Situation Summary (July 2025)
[2] Reuters – Coverage of the Federal Reserve’s July 30, 2025 decision
[3] Reuters – U.S. nonfarm payrolls barely rise in July
[4] International Monetary Fund – July 2025 World Economic Outlook Update
[5] Reuters – Euro zone inflation holds at 2%
[6] Reuters – Bank of Japan holds rates and hints at hike
[7] Reuters – Canada’s manufacturing PMI remains below 50

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🧐 AI Transparency Note:
This article was prepared with the help of artificial intelligence tools and verified economic data from reputable global sources. It does not contain investment advice.