Employment Revisions Reveal Hidden Economic Weakness

The S&P 500 finished the week down 2.36%, driven primarily by heightened market volatility surrounding tariff implementation and disappointing employment data that revealed underlying economic weakness.

Tariff Uncertainty Weighs on Markets

The announcement that reciprocal tariffs will take effect Wednesday, August 7th, created significant uncertainty across markets. The complex structure—10% tariffs on countries with trade surpluses with the U.S. and 15-50% rates for deficit countries—introduces unpredictable supply chain costs. The Federal Reserve's preferred inflation measure, PCE, already showed tariff effects with a jump to 2.6% annually in June, largely from tariff-sensitive goods like furniture and recreational items posting their biggest gains in over two years. This inflation acceleration complicates the Fed's policy decisions and suggests consumers should prepare for broader price increases.

Employment Data Reveals Hidden Weakness

Friday's employment report delivered a significant shock, with July adding only 73,000 jobs—well below expectations. More concerning were massive downward revisions: May's job gains were slashed by 125,000 to just 19,000, while June was revised down by 133,000 to only 14,000. Combined, these revisions mean employment for May and June was 258,000 lower than originally reported, painting a much weaker picture of recent job market momentum than previously understood.

The unemployment rate rose to 4.2%, while labor force participation declined to 62.2%—down 0.5 percentage points over the past year. This data supports the "no hire, no fire" environment I've been observing, where employers remain cautious about both hiring and layoffs. Manufacturing employment declined significantly according to the ISM Manufacturing PMI, which fell to 48.0% for the fifth consecutive month of contraction.

Federal Reserve Maintains Cautious Stance

The Fed held rates steady at 4.25%-4.5% for the fifth consecutive meeting, though notably, two governors dissented in favor of a quarter-point cut—the first time since 1993 that multiple officials voted against the majority. Chair Powell emphasized data dependence and made no September commitments, citing the need to assess tariff impacts on inflation over time.

Housing Market Continues Cooling

The housing sector showed continued softness with home prices rising just 2.3% year-over-year in May—the smallest gain since July 2023. Pending home sales fell 0.8% in June, missing expectations and declining 2.8% annually. High mortgage rates around 6.8% and affordability constraints continue keeping buyers on the sidelines despite rising inventory.

Economic Growth Shows Mixed Signals

Second-quarter GDP rebounded to 3.0% annualized growth after a 0.5% first-quarter contraction. However, economists caution this largely reflects technical factors, particularly businesses front-loading purchases ahead of tariff deadlines rather than genuine economic strength. Consumer spending showed resilience with a 0.3% June increase, though real income remained flat after accounting for inflation.

Outlook

The combination of tariff-driven inflation pressures and weakening employment trends creates a challenging environment for both the Fed and markets. While unemployment remains historically low and wage growth continues, the massive employment revisions suggest economic momentum has been weaker than previously reported. The upcoming tariff implementation adds another layer of uncertainty to supply chains and consumer prices, potentially constraining the Fed's ability to cut rates despite softening labor market conditions.

By The Numbers

Employment Indicators

Employment data helps gauge whether consumers have jobs and money to spend. Consumer spending accounts for more than 70% of GDP.

Note: Values above 250K for the 4-Week Average, combined with rising unemployment, could signal a weakening economy.
Next unemployment report: September 5, 2025. Source: Department of Labor

Economic Growth (Real GDP)

GDP growth provides a broad measure of overall economic activity and signals whether the economy is expanding or contracting.
Source: Bureau of Economic Analysis; Estimate from Federal Reserve Bank of Atlanta

Inflation Measures (CPI Year-over-Year)

Source: Bureau of Labor Statistics; Estimate from Federal Reserve Bank of Cleveland

Note: While inflation has moderated, new tariffs may cause temporary spikes in monthly data. Once tariffs have been in place for a full year, inflation should revert closer to the underlying trend.

Interest Rate Outlook

Current Fed Funds Rate: 4.25-4.50%

Note: Changes in monetary policy expectations reflect market participants' views on how the Fed will likely respond to shifts in inflation or employment.
Source: CME FedWatch Tool

Corporate Earnings Outlook (S&P 500 Estimates for 2025)

Source: S&P Dow Jones Indices

Market Valuation

Note: Equity valuations remain expensive by historical standards

Disclosure:

This material is provided by Todd Van Der Meid, MBA, CFP®, through Rhino Wealth Management, Inc., a Registered Investment Adviser, solely for informational purposes. It is not intended as investment, tax, legal, or accounting advice. Investors should consult qualified professionals before making financial decisions.

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