Encountering a cold employment wave in the scorching summer heat? The U.S. labor market in July is expected to continue its weakness, and the "low hiring and low layoffs" pattern may conceal hidden concerns.

As the U.S. Department of Labor prepares to release the July non-farm payroll report on Friday, the market is once again focusing on the labor market, which has exhibited strange resilience amidst tightening policies and geopolitical turmoil. Economists generally expect that employment growth in July will continue the weak pace observed in recent months. Beneath the seemingly stable unemployment rate, the significant contraction in labor force participation and the uneven performance across industries paint a complex picture of "low hiring, low layoffs." Meanwhile, the acceleration of labor productivity in the second quarter and the emergence of structural wage differentiation have added new variables for the Federal Reserve in balancing the dual mandates of inflation and employment. A survey of economists indicates that the estimated increase in non-farm employment for July is expected to be 83,000, showing a slight rebound from June's modest gain of 57,000, but still less than half the pre-pandemic average monthly growth of nearly 200,000 observed over the ten years prior. The capacity for job creation has significantly declined compared to the normalized expansion between 2022 and 2024, let alone the acceleration hints seen in the springafter March's non-farm job additions had reached 214,000, they were quickly undermined by the outbreak of conflicts in the Middle East, leading to a surge in oil prices and costs. Forward-looking indicators broadly point to weakness. Data released by the ADP Research Institute on Wednesday showed that private sector employment in July increased by only 44,000 jobs, which is the lowest monthly gain since January of this year and a further slowdown from June's 95,000. Using its extensive 401(k) contributor data, Vanguard estimates that the increase in non-farm employment for July might only be 18,000, a significantly lower figure than the consensus estimate, raising concerns that summer weakness may extend into the fall. The "low hiring, low layoffs" balance under an extremely low layoff rate In sharp contrast to the sluggish hiring landscape, the other side of the labor marketlayoffsremains unusually calm. Data from the Department of Labor show that for the week ending August 1, seasonally adjusted initial jobless claims rose slightly by 1,000 to 199,000, remaining at the low end of the annual range of 189,000 to 230,000. The non-seasonally adjusted figures, which more accurately reflect trends, fell further to 175,000, marking one of the lowest levels in 60 years. A report from global outplacement firm Challenger, Gray & Christmas revealed that the number of layoffs announced by U.S. employers in July plummeted by 27% month-over-month to 33,429, and fell by 46% year-over-year, setting a record low since July 2024, with layoffs primarily concentrated in the tech sector without widespread job losses associated with the extensive deployment of artificial intelligence (AI). This situation, where companies are neither eager to hire nor to lay off, has been accurately summarized by Federal Reserve Governor Lisa Cook as a "balance of low hiring and low layoffs." She noted, Although the hiring rate is low, the unemployment rate remains steady because layoffs are also at a low level. This balance is rooted in the geopolitical and cost environments confronted by businesses: the war between the U.S. and Iran has entered its sixth month, with rising oil prices and rekindled inflation pushing overall operating costs higher. Companies have opted for conservative strategies of freezing hiring and postponing vacant positions to manage controllable labor expenses. In addition, the immigration restrictions continued by the Trump administration have significantly reduced the available labor pool, making it difficult for companies to find suitable candidates even if they intend to expand hiring, further solidifying their stance of retaining current employees and not letting them go easily. However, this state of low hiring is particularly detrimental to specific groups. Cook admitted that this balance "hits some groups especially hard, including newcomers, and may understandably suppress worker sentiment." Young workers and new entrants attempting to carve out career paths become the most direct victims of scarce job opportunities. The slack hidden beneath participation rates: the real temperature beneath the unemployment rate The current unemployment rate of 4.2% (June data, expected to remain unchanged in July) appears stable, yet it conceals a troubling indicatora significant drop in labor force participation rates. In June, the participation rate unexpectedly plummeted to 61.5%, the lowest level since March 2021 when the economy was still reeling from COVID-19 impacts; excluding the pandemic period, it would date back to June 1976. Particularly concerning is the sharp decline in the "prime-age participation rate" covering those aged 25 to 54, which has dropped to its lowest since December 2023, setting the record for the largest monthly decline since the pandemic was declared in April 2020. The contraction in participation rates means that the apparent stability of the unemployment rate is largely due to a mass exit of workers from the labor force rather than strengthening job conditions. In fact, since 2026, the total number of employed individuals in the U.S. has cumulatively decreased by 833,000. Economists will closely monitor whether the participation rate rebounds in Julyif the fluctuation is merely a short-term anomaly due to seasonal factors or statistical disturbances, it may not be a cause for concern; however, if this trend solidifies, it would indicate a deeper level of weakness in the labor market that far exceeds what the overall unemployment rate suggests. Vanguard anticipates that the rise in non-participation rates reflects lackluster hiring, which is particularly challenging for young workers We expect that the majority of the decline in participation rates will reverse in the coming months, but as these workers re-enter the labor market faster than they find jobs, it will put upward pressure on the unemployment rate. In other words, even if job opportunities do not experience a steep decline, merely correcting the participation rate could be sufficient to push the unemployment rate higher. Citigroup economist Veronica Clark explicitly stated in a report: While current labor market data is still described as stable, we expect conditions to change in the coming months, with the unemployment rate rising to over 4.5%. At that point, market attention will shift back to interest rate cut expectations. Healthcare bears the load, while construction and services are on divergent paths Beneath the aggregate figures, the structural dislocation between industries is particularly pronounced. Since 2026, healthcare services such as hospitals and clinics have contributed over half of the new jobs in the U.S., becoming the only solid pillar amidst the precariousness of the labor market. This trend continued without question in July. ADP data show that the education and healthcare services sector added 36,000 jobs that month, leading all major industries. The ongoing shortage of healthcare personnel has forced employers to engage in fierce competition for qualified talent with high salaries. Another starkly different example comes from the construction industry. Although this sector added only 1,000 jobs in July according to ADP statistics, salary increases for job switchers surged to record highs. ADP Chief Economist Nela Richardson attributes this phenomenon to the strong demand for AI-related data center construction amid a severe shortage of skilled labor. She remarked, Salaries reflect a labor market that is not only not easing but may be slightly tightening. What you see is localized supply constraints. Overall wage dynamics are also showing concerning differentiation. Although the Department of Labor's report indicates that the average hourly wage is expected to grow by 0.3% month-over-month and 3.5% year-over-year in Julythis growth rate is comparable to pre-pandemic levels and roughly aligns with the Federal Reserve's 2% inflation targetADP data show that the year-over-year salary growth for employees changing jobs accelerated to 7% in July, the fastest since August 2025; while the annual salary growth rate for those remaining in their positions stabilized at 4.4%. The localized tightening of the labor market is especially evident among low-income groups. A report from Bank of America Research indicates that the post-tax wage growth rate for low-income households increased to 5.2% year-over-year in July, surpassing high-income households for the first time since the end of 2024, showcasing a trend of upward convergence rather than downward flattening. Senior economist David Tinsley believes this suggests that there are some tightening signs overall in the labor market. Productivity surge amidst cost challenges: will price pressures be alleviated as a result? Just one day before the employment report is released, the Department of Labor published another set of key data: in the second quarter, non-farm labor productivity increased at an annualized rate of 1.4%, significantly exceeding the market expectation of 0.6% and notably higher than the upward-revised first-quarter figure of 0.8%. From the fourth quarter of 2019 to the second quarter of 2026, the average annual growth rate of productivity reached 2.1%. The labor share of income, which reflects the proportion of worker compensation in output, fell to a record low of 52.9%, indicating that capital and technology are capturing more significant benefits. The unexpected acceleration in productivity is partly attributed to companies' applications of AI, allowing them to extract more output from existing employees despite sluggish labor growth. Pantheon Macroeconomics economist Oliver Allen commented, Weak labor growth may be prompting companies to squeeze a little more out of their existing staff. The improvement in productivity effectively suppresses unit labor costs. The annualized increase in unit labor costs in the second quarter was only 1.3%, with a year-over-year increase of just 1.4%, well below expectations, while hourly wage growth was an annualized rate of 2.7%, also remaining moderate. Looking solely at labor costs, the chain through which wages are transmitted to inflation seems to have been absorbed by labor productivity. Richardson noted that while recent wage growth deserves attention, I dont believe this is sufficient to slip into a wage-driven inflation cycle. However, another set of data reveals a more complex story. In the second quarter, unit non-labor costswhich include corporate profits, indirect taxes, and other non-labor cost factorssoared at an annualized rate of 14%, marking the fastest increase in four years, with a year-over-year increase of 9%. Stephen Stanley, Chief U.S. Economist at Santander U.S. Capital Markets, pointed out that under the current environment, solely relying on relatively moderate unit labor costs is not sufficient to achieve the 2% inflation rate. In other words, if corporate profits and non-labor costs such as energy and taxes continue to inflate, even if wages do not rise, overall price pressures are unlikely to dissipate. FWDBONDS Chief Economist Christopher Rupkey places ultimate hope on AI: Whether a true productivity miracle can mitigate some of the burdensome price costs borne by consumers and businesses and control overall inflation will depend on whether emerging advances in AI can indeed enable workers to produce goods and provide services at lower costs. Is another rate hike imminent, or is there still a possibility of rate cuts? Amid such mixed signals, the Federal Reserve's decision-making focus remains firmly locked on the inflation side. Chairman Kevin Walsh defined the labor market as stable last week, and several officials clearly indicated that unless inflation markedly improves, tightening will remain the course. At last month's meeting, the Federal Open Market Committee maintained the benchmark interest rate unchanged at 3.50% to 3.75%, yet three committee members had leaned toward a 25 basis point rate increase. Governor Cook also openly stated that she would support a rate hike if inflation did not align. However, the potential fragility of the labor market, alongside the already manifest contraction of total employment, is leading some observers to bet that policy will have to shift within the year. Citigroups forecasts have notably diverged from market consensus, predicting three rate cuts will be restarted between now and January 2027, with the first cut possibly occurring in the fourth quarter of this year. Their core reasoning is that the upward pressure on the unemployment rate brought about by the rebound in participation rates will reveal that the stable labor market will lose its protective coloration in a matter of months, forcing the Federal Reserve to pivot from focusing on inflation to nurturing employment once again. Vanguard also shares concerns that if the summer's sluggishness continues into the fall, it will significantly increase the probability of a policy shift.