Labor Market Overview

NOTE: Data for October 2025 were not collected due to the federal government shutdown.

At a Glance

Employment:

The Bureau of Labor Statistics (BLS) reported job loss of 23,000 jobs in July, the first decline since February. The job gains in May and June were revised down by a total of 103,000 jobs. With these changes, the positive job performance over the previous 4 months appears less as a return to strong employment growth and more like a temporary surge in March that softened with each passing month before ultimately contracting in July.  Real private-sector wages also declined, signaling additional weakness in the labor market.

Unemployment:

The U-6 unemployment rate, which includes discouraged, underemployed, and unemployed workers in the country, remained at 7.9% in July. The U-3 unemployment rate, which indicates only the number of unemployed people actively seeking a job, ticked down to 4.1%. The labor force participation rate has been in steep decline since November 2025 and descended further to 61.4%. If it declines any more, it will be on par with 2020 rates at the height of the Covid lockdowns. This downward path shows a labor market where frustrated job searchers are giving up and leaving the labor force which leaves the unemployment rate showing overly optimistic results. 

New Developments

Leisure & Hospitality weakened for a second consecutive month, but the July decline is better interpreted as unusually weak seasonal hiring than as a wave of outright layoffs. Employment fell by 40,000 on a seasonally adjusted basis in July, following a decline of roughly 43,000 in June on the latest revised data. Restaurants and bars accounted for most of the July weakness, with Food Services and Drinking Places down 26,100 jobs, while Amusement, Gambling, and Recreation Industries lost 10,100 and Performing Arts, Spectator Sports, and Related Industries declined by 6,300. Accommodation, by contrast, added 2,600 jobs. One revealing feature is that total Leisure & Hospitality employment increased slightly on an unadjusted basis between June and July—from 17.667 million to 17.676 million. The negative seasonally adjusted figure therefore indicates that employment failed to rise by as much as it normally does at this point in the summer. BLS does not identify a specific cause, so it would be premature to attribute the weakness to any single factor. Still, two consecutive months of below-normal staffing in restaurants, recreation, and entertainment are consistent with employers in highly discretionary consumer industries becoming more conservative about summer headcount. The fact that the weakness remains concentrated in food service and recreation rather than lodging also suggests that the slowdown is not simply a broad collapse in travel-related employment.

Government employment produced the largest drag on the July payroll figure, almost entirely because of local government education. Government payrolls declined by 53,000, including a 57,000 decrease at the local level. Local Government Education alone accounted for 49,600 of those losses, while Local Government Excluding Education fell by 7,800. Federal employment declined by only 3,000 and state government employment increased by 7,000, making the July result primarily a local-school phenomenon rather than a broad contraction across the public sector. As with Leisure & Hospitality, seasonal adjustment is important to the interpretation. Local education payrolls routinely fall dramatically when the school year ends: on an unadjusted basis, employment dropped by more than one million between June and July. BLS attempts to remove that normal summer pattern, meaning the reported 49,600 decline represents a larger reduction than seasonal factors would ordinarily predict. Possible explanations include differences in school-calendar timing, summer-program staffing, vacancies being left unfilled, or tighter district budgets, but those should be viewed as speculation rather than BLS findings. The broader context is notable: BLS said local-government education had shown little net employment change over the previous twelve months, so July interrupted what had otherwise been a relatively flat trend.

A Deeper Look

The July report shifts the Federal Reserve's employment-risk calculation, although it does not make a September rate cut automatic. Only nine days before the jobs report, the FOMC kept the federal funds target range at 3.50%–3.75% and characterized job gains as keeping pace with the workforce. July's 23,000 payroll decline, combined with 103,000 in downward revisions to May and June, makes that characterization harder to sustain. The three-month average payroll change is now only about 20,000 jobs, a marked deceleration even allowing for slower labor-force growth. That gives policymakers more reason to worry about the employment side of the dual mandate and makes an easing move at the September 15–16 meeting more plausible than it appeared immediately after the July FOMC decision. However, the Fed still faces a significant counterweight: its July statement said inflation remained elevated relative to the 2% objective, and three FOMC members dissented in favor of a 25-basis-point rate increase. Governor Waller had said in July that his policy focus would remain on inflation unless there was evidence of a significant weakening in the labor market. This report is the type of evidence that could begin to meet that test, but one payroll report is unlikely to settle the issue. However, July materially lowers the bar for a September cut, while upcoming inflation data and the August employment report will determine whether the Committee concludes that labor-market downside risk now outweighs the inflation risk.

 Several details outside the headline reinforce the impression that hiring momentum has become unusually fragile. Private payrolls increased by 30,000 in July, meaning the 53,000-job government decline was sufficient to push total payroll employment into negative territory. More concerning for the underlying trend were the revisions: May employment growth was reduced from 129,000 to 63,000 and June from 57,000 to only 20,000, a combined downward revision of 103,000. Taken together with July, payrolls have increased by an average of only about 20,000 per month over the last three months. Even Health Care, one of the most dependable sources of employment growth, added just 22,000 jobs compared with an average monthly increase of 36,000 during the preceding twelve months. The household data was less alarming but did not provide a strong offset. The unemployment rate edged down to 4.1%, yet labor-force participation has fallen 0.7 percentage point since January. Temporary layoffs also increased by 153,000 to 921,000. Wage pressure continued to be moderate: nominal hourly earnings rose only two cents during July and were up 3.2% from a year earlier. Altogether, the report looks less like a single bad monthly print and more like evidence that the economy has returned to a very low-hiring environment in which relatively modest additional weakness could produce more visible deterioration in employment.

Geographic Solutions derives its employment forecast and unemployment rate forecast from internal data on the number of job openings, searchers, and employment and unemployment applications filed on Geographic Solutions' state client sites. The forecast uses unemployment claims data from the U.S. Department of Labor (USDOL).

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