By Jan Viebig, Chief Investment Officer, ODDO BHF SE.
American stock markets seem to be in a good mood again. But things are not as good as they appear. The US has many highly dynamic sectors and regions, alongside some that are far weaker. Commentators have increasingly been quoting the phrase “Markets are climbing a wall of worry” to describes a situation in which markets continue to rise despite mounting concerns.
The labour market is one such cause for worry. It has begun to show signs of weakness, which could indicate a broader deterioration in the economy. President Trump is likely aware of the sensitive role played by the labour market. He recently fired the director of the Bureau of Labor Statistics (BLS), Erika McEntarfer, following a weak July labour market report, which President Trump painted as a conspiracy against his administration. The BLS had revised job creation figures for May and June downward by approximately 258,000 jobs, an adjustment that was confirmed by the Senate.
The unemployment rate rose slightly to 4.2% in July 2025 from 4.1% a month earlier, an unremarkable change. Somewhat more worrying, however, is the rise in youth unemployment, as young people entering the workforce or starting their careers are typically the first to be affected when companies start to cut back (see Figure 1). In July 2025, the unemployment rate for 16- to 24-year-olds was inching closer to 10%. Even graduates with a bachelor’s, master’s, or PhD degree are finding it harder to land a job. American companies created 73,000 jobs last month, significantly less than the 143,000 that was expected. What created political waves, however, was the BLS’s decision to review new job creation for the previous two months downward by 258,000. This implies that the US saw average monthly job growth of only 35,000 over three months from May to July. If this trend were to continue, job growth would be below the level needed to keep unemployment at the current rate. To maintain the current rate would require 70,000 to 90,000 new jobs per month, according to economists at the Federal Reserve Bank of San Francisco.
Figure 1: Unemployment rate for entry-level graduates in the US
Source: Federal Reserve Bank of St. Louis, FRED. Absolventen mit Bachelorabschluss 20-24 Jahre: Graduates with a bachelor’s degree, age 20–24; Absolventen mit Bachelorabschluss 25-34Jahre: Graduates with a bachelor’s degree, age 25–34; Absolventen mit Masterabschluss 25-34 Jahre: Graduates with a master’s degree age 25–34; Absolventen mit PhD-Abschluss mehr als 25 Jahre: Graduates with a PhD degree, over 25. Januar 2025: January 2025, Juli 2025: July 2025.
When asked by an NBC News journalist whether the administration had any evidence that the job numbers had been manipulated, the director of the White House National Economic Council, Kevin Hassett, replied: “Well, the evidence is that there have been a bunch of revisions.” In fact, discrepancies between preliminary and revised jobs numbers are not unusual, even on this scale. They are a result of the BLS’s methodology, which relies on two separate surveys. First, the BLS collects data from around 60,000 private households through the Current Population Survey (CPS), which it uses to calculate the total labour force and the unemployment rate. Second, a survey of roughly 121,000 public and private employers (Current Employment Survey, CES) is used to estimate job gains and losses. However, these data only paint a preliminary picture of the labour force. In the two subsequent months, the BLS refines job numbers with data from follow-up reports and surveys, among others by incorporating data from employment agencies. Lastly, the figures are recalculated on an annual basis by incorporating information from state unemployment insurance tax records.
It is therefore unlikely that the data showing a slowdown in the labour market is a conspiracy by enemies of President Trump within government. Rather, the slowing momentum is the result of a general slowdown, as well as Trump’s economic policies. It was apparent before Trump took office in January 2025 that economic growth was slowing – not a cause for concern, in and of itself. However, Trump’s policies are putting a strain on the US economy in two ways. First, his tough tariff policy is driving up prices in the US and creates supply bottlenecks where imports cannot be substituted by locally made products. Second, the president’s harsh stance on immigration is starving the American economy of the workers it needs. Labour shortages have grown particularly severe in hospitality, restaurants, and agriculture. In June, Trump responded by suspending raids and arrests of illegal workers. At the same time, he has also restricted legal immigration, for example, by tightening rules on the issuance of green cards, which grants the right to reside and work indefinitely in the US.
In addition, sentiment indicators are deteriorating. The ISM Purchasing Managers Index (PMI) for manufacturing fell to 48.0 points in June, its lowest level since October 2024. Private consumption has also lost momentum. Personal consumption expenditures slowed in inflation-adjusted terms during the first half of the year. Moreover, consumer confidence is subdued, and the housing market is sluggish.
Given these warning signals, investors should pay close attention to the US labour market, as it could influence the Fed’s monetary policy decisions. The Sahm rule, developed by American economist Claudia Sahm, posits that a recession is underway when the three-month moving average of the national unemployment rate increases by 0.5 percentage points or more compared to its low during the previous 12 months. However, the US labour market has not yet reached this point.
The Fed has so far resisted Trump’s demand for drastic rate cuts. Despite continued pressure from the White House, the Fed opted not to cut rates at its July meeting, leaving them unchanged at 4.25–4.50% since September 2024. To justify its decision, the Fed points to an inflation rate of 2.9%, based on the Consumer Price Index (CPI), and, more importantly, the likelihood that Trump’s tariff policy will increase pressure on prices.
However, growing tensions in the labour market, combined with a slowing economy, increasingly argue in favour of a rate cut. Market participants have already priced in two to three interest rate cuts to the end of the year, starting from September. Many observers expect Fed Governor Jerome Powell to take advantage of the annual conference of central bankers, which began Friday in Jackson Hole, to announce a cautious easing of monetary policy.
The situation has become increasingly uncomfortable for equity investors in recent weeks, prompting us to underweight equities in the portfolios we manage and to become even more selective in our US equity investments. We made this decision with a heavy heart, as US markets offer many well-managed companies with compelling business models.
