Tight Labor Market Slows Amid Tariff Fears
The US labor market remains tight despite a slowdown in payrolls, according to RBC's analysis. In July, nonfarm payrolls are expected to rise by just 63K, which is slower than the first half of the year but still sufficient to keep the unemployment rate steady at 4.2%.
Layoffs remain exceptionally low, with initial claims dropping by a record 39k last month and continuing claims falling by 30k. However, hiring breadth narrowed in June and is expected to continue narrowing in July, with health care and social assistance likely accounting for the bulk of job gains.
Trade-exposed sectors are still recovering from job losses in 2025, but RBC expects weakness in manufacturing due to seasonal re-tooling and new tariffs. Services hiring has been mixed, with job losses concentrated in information and finance, particularly in the real estate sector where mortgage and non-mortgage loan brokering have cut around 45k jobs since peaking in early 2022.
The Federal Reserve's focus should remain on inflation, as despite the slowdown in payrolls, RBC expects the unemployment rate to hold steady through year-end. Next week's ISM Manufacturing and Services releases will provide early signs of inflationary pressures, with price indices likely to remain exceptionally high.