The US Labor Market Is Sending Mixed Signals, Here's What Its Means.

This week’s labor data paints a complex picture of the US economy. On the surface, the job market appears healthy. Unemployment remains low, and initial jobless claims are stable. But a closer look reveals a labor market that is losing momentum beneath the surface, aligning with a broader sense of uncertainty and signaling that we are entering a late-cycle phase of the expansion.

On Friday, the BLS (Bureau of Labor Statistics) released the headline nonfarm payroll (NFP) print for July which was reported at just 74,000 jobs, according to the release. While this figure alone might seem modest or acceptable, it becomes more concerning when we factor in the substantial downward revisions to prior months:

• June: revised down from 147,000 to just 14,000

• May: revised from 139,000 to 19,000

• April: revised from 177,000 to 158,000

• March: revised from 228,000 to 120,000
  

These changes dragged the 3 month moving average down to just 35,000 jobs per month, signaling a considerable loss of hiring momentum. In fact, the final July number of 74,000 marks one of the lowest monthly job gain in the past five months per-revisions. When we examine the seasonally adjusted data, job growth looks especially sluggish. And the non-seasonally adjusted (NSA) data, which reflects raw job totals, showed that July saw a sharper decline in payrolls than is typical for the month, suggesting that employers may be slowing down hiring or even trimming headcount earlier than usual.

Source - BLS

According to Arch Global Economics, total job growth is now running below its pre-COVID trend, and indicators of hiring momentum are clearly weakening. This combination of tepid current growth, downward revisions, and seasonal weakness hints at a labor market that is not collapsing, but is losing steam in a quiet, broad based way.

One of the most important ways to understand the health of the labor market is to look beyond the total number of jobs added and instead ask, how many industries are actually hiring? That’s what the private sector job diffusion index measures. It shows the percentage of industries that are expanding employment, a way to track whether job growth is broad-based or concentrated in just a few areas.

Source - BLS

According to the chart, the 1mth diffusion index for private sector jobs is currently hovering around 58, with the 3mth and 6mth averages slightly higher around 60 to 62. These levels are still above the contraction line at 50, but they’ve clearly drifted lower since early 2023, when all three metrics were in the 70 to 75 range. This decline suggests that job growth has become less widespread. While many sectors are still adding jobs, fewer and fewer are doing so each month. Importantly, we’re not seeing a collapse, we’re seeing a slow narrowing of the hiring base. Historically, this kind of drift lower in the diffusion index is a classic late cycle signal. It doesn’t mean a recession is here, but it often shows up before the economy starts to stall, especially when combined with slowing payroll growth and weak revisions (which we’re already seeing). It’s also worth noting that the manufacturing sector, typically more sensitive to economic cycles, has already slipped into contraction. That’s been the case since early 2023, and a short lived rebound in early 2025 has since faded.

In short, hiring is still happening, but in fewer places. That’s a yellow flag, not red yet, but definitely worth watching closely.

Despite that, the labor market isn’t moving in one direction, it's splitting into two distinct tracks. On one side, you have private sector jobs, which make up around 68% of all U.S. employment. Growth here is clearly slowing. Over the past year, private sector job creation has slowed to just 0.3%, a signal that businesses are growing more cautious, either due to economic uncertainty, higher interest rates, or margin pressures. On the other side, government and quasi-government jobs, including sectors like public education and health care, are growing much faster, at about 1.8%. These jobs make up roughly 1/3 of total employment, and their continued strength is masking the underlying weakness in the private sector. This kind of divergence is typical of late cycle labor dynamics, as private employers pull back on hiring due to margin compression or fading demand, public sector hiring (often supported by fiscal budgets or delayed economic sensitivity) steps in to keep headline job numbers afloat. But that doesn’t mean the economy is strong underneath, it means growth is becoming more reliant on government spending.

This divergence is also reflected in wage growth.

• Service sector jobs, many of which are public or quasi-public, are still seeing solid wage gains of around 3.4% annualized. This suggests that labor demand in these sectors remains strong enough for employers to raise pay, likely due to persistent shortages and inflation pass through.
  

• But in goods producing sectors, like manufacturing, construction, and transportation, wage growth has fallen sharply to just 2.4%. That’s a warning sign. It implies that firms in these more cyclical industries are either under profit pressure or seeing less demand, and can no longer afford to raise wages as they were a year ago.
  

  

  Source - Bloomberg

While headline job numbers can sometimes be noisy or revised later, real time indicators of hiring are telling a clearer, more consistent story, and it’s one of broad labor market softening. Goldman Sachs’ internal model, which estimates the underlying trend in job growth, has shown a sharp deceleration:

• January: +192,000

• April: +142,000

• July: +120,000

• August (preliminary): just 28,000
  

  

  Source - Goldman Sachs

This model corrects for survey volatility, adjusts for immigration effects, and blends both payroll and household data to filter out statistical noise. Despite all those smoothing factors, the signal is unmistakable, hiring momentum is grinding to a halt.

This is supported by the JOLTS (Job Openings and Labor Turnover Survey) data, which shows clear signs that employers are pulling back,

• Job openings have dropped from their 2022 highs of over 12 million to closer to 8.8Mil , as of the latest reading.

• The hiring rate, the pace at which firms are bringing in new workers, has slowed to pre-pandemic levels.

• Meanwhile, the,quits rate a measure of worker confidence has fallen steadily, suggesting that fewer workers feel confident about leaving their jobs for better ones.
  

Taken together, this shows a job market that is not collapsing, but is clearly normalizing (from COVID growth)  and perhaps overshooting into weakness. Firms are no longer competing aggressively for labor, and job seekers are growing more cautious. Goldman calls this a “real-time stall” in labor market momentum. And when you combine that with falling job openings and a lower quits rate, it becomes clear that the demand for labor is slowing well before unemployment shows a significant rise.

However, despite the clear signs of a hiring slowdown from payrolls, revisions, and job openings data, initial jobless claims remain surprisingly stable hovering around 220,000 per week. This may seem like a contradiction, but there are several important reasons why layoffs aren’t showing up in the data just yet.

Source - Bloomberg

First, companies may be "labor hoarding." After facing years of hiring challenges during and after the pandemic, many businesses are reluctant to let workers go, even if demand softens a bit. They fear that if the economy rebounds or they need to rehire, it will be difficult and expensive to find qualified staff again. This factor further heightened by the anti immigration push by the Trump admin making making it difficult for smaller companies to release trained employees. Second, the rise of the gig economy is likely distorting traditional measures of joblessness. Many people now work as independent contractors or in informal, non-payroll jobs (like rideshare drivers, freelancers, or delivery workers). These workers usually don’t qualify for unemployment benefits, so if they lose income or work, they don’t show up in jobless claims at all.

Finally, jobless claims tend to lag behind other labor market indicators. In most economic cycles, layoffs don’t spike immediately, they rise after hiring slows and profit margins come under more pressure. If the current hiring freeze continues or deepens, we could see claims move higher in the coming months.

Given all of this, the labor market is not falling apart. Instead, it’s sending conflicting signals that reflect a maturing cycle or at least on that is in transition given the immigration patterns, heightened tariff uncertainty and weakness in corporate profit margins. We are seeing that

• Hiring is slowing but layoffs remain subdued.

• Wage growth is uneven across sectors.

• Quasi Public sector strength is concealing private sector softness.
  

This makes the Fed’s job harder (despite Powell saying the labor market is strong in his recent FMOC address). While there’s a case for a pause in September, a rate cut likely requires more definitive weakness or a sharp rise in unemployment, neither of which is present yet despite the market pricing in cuts as early in September.

Source - Bloomberg

Regardless, for investors and policymakers alike, the message is clear, the job market isn’t broken but it is uncertain, and as time goes on if uncertainty continues to build those conditions will continue to show on the downside and that alone changes the game.