US Economy Faces Headwinds: Analyzing the Latest Data

Last week's economic data finally caught up with the economic conditions that corporate executives and consumers have been describing for much of this year: namely, that some warning signs are flashing.

Friday's jobs report showed a much weaker labor market than previously reported. Consumer spending, adjusted for inflation, declined in the first half of the year, while the Federal Reserve's preferred price gauge ticked up in June.

Sarah House, a senior economist at Wells Fargo, said the U.S. economy is “struggling to find its footing.” She added, “Businesses and consumers have been dealing with a whirlwind of economic policy changes, high inflation, and still somewhat tight monetary policy. That combination of forces that worried about weakening momentum, is unfortunately, starting to come to fruition.”

Labor Market Shock and Political Fallout

Friday’s jobs data, including the erasure of nearly 260,000 jobs from May and June figures, shocked markets and upended the view of a solid labor market heading into summer. As a result, average job growth over the past three months has been just 35,000, the worst performance since the pandemic.

The report cast doubt on the Federal Reserve’s decision, days earlier, to hold interest rates steady. It also ignited a political firestorm, with former President Trump calling for the firing of the Bureau of Labor Statistics chief and reiterating calls for the Fed and Chairman Powell to cut rates.

Adding to the uncertainty, the surprise announcement of Fed Governor Kugler’s resignation provided Trump with an earlier-than-expected opportunity to install a policymaker aligned with his vision.

Uncertainty Impacts Businesses and Consumers

Many companies have put investment and hiring plans on hold as they try to figure out what Trump’s economic policies, mainly tariffs, will bring. The housing market just experienced its worst spring in 13 years. And consumers, facing increasing debt, have cut back on discretionary spending.

Gregory Daco, chief economist at Ernst & Young, said, “That struggle is likely to continue as prices rise and as businesses and consumers find it more difficult to spend and invest.”

That being said, the U.S. economy is still expected to keep chugging along, albeit at a slower pace than in years past. Forecasters expect the economy to grow 1.5% this year and 1.7% in 2026.

Consumer Spending Contraction

From Chipotle Mexican Grill to Procter & Gamble, many companies have noted that economic uncertainty is weighing on demand.

Andre Schulten, chief financial officer at Procter & Gamble, noted that “we see consumption trends continuing to decelerate, albeit by small margin. We are seeing that deceleration in the U.S. Consumers' felt volatility, I think probably is not necessarily driven by their current reality, but more based on their expectations of the future.”

Meanwhile, June data showed that prices for imported furniture and appliances have risen, suggesting some companies have begun passing higher tariff costs onto consumers.

Even after the Trump administration reached deals with major trade partners, tariffs announced last week will raise the average U.S. tax rate on global goods. Many economists expect import taxes to push up prices in the coming months.

Federal Reserve officials, tasked with the dual mandate of taming inflation and keeping unemployment low, now face increased pressure to lower interest rates before the economy cools down excessively.

Huge Data Revisions

Revisions to government data, like non-farm payrolls, are routine and usually don’t garner much attention. But the size of last week’s revisions practically flipped the picture of the labor market from solid to near-stall speed.

Following the release of the data, prices for two-year U.S. Treasury notes, which are closely tied to the Fed’s short-term interest rates, soared, while the S&P 500 plunged.

Equifax CEO Mark Begor said on a July 22 earnings call, “When businesses get nervous about the future, they tighten their belts. And the first place they tighten their belts is on hiring.”

Despite the hiring slowdown, most companies have avoided layoffs. Even with a slight uptick in the unemployment rate to 4.2% in July, it remains at a relatively low level. Nonetheless, the numbers highlight the growing plight of the unemployed.