Parker Ross

The regime change appears to be underway

Wow

#EconSky

The 16-24 cohort is on the second axis (the) because it is much higher, hence the green arrow pointing right.

Same measure, just different scale.

Going forward, there is little reason to expect these trends to reverse in the near-term.

Thus, the government sector is likely to remain an increasing drag on overall job growth.

At the state and local level, any remaining growth is now due to non-education government jobs.

Education jobs have leveled off or even turned lower at the state and local level.

Here's a look at the government payrolls by segment, indexed to Feb '20 = 100.

While the growth has cooled, the sharp shift down in Federal payrolls is clear.

Looking at a longer chart of government employment, it's clear this sector has shifted from previously supporting growth to a small but notable drag.

Layoffs at the federal level are now procedurally safe and likely to accelerate, contributing directly to the uptick in federal employee initial unemployment claims and a continued drag on total job growth.

That delay earlier this year seemed to hold layoffs in limbo, but with the legal green light now in hand, initial claims are beginning to reflect renewed activity, which maps onto the recent spike I noted above in UI filings.

The Supreme Court ruling removed a key legal hurdle, paving the way for a new wave of layoffs or RIF implementations.

Others, including the State Department and VA, are moving forward with planned terminations, sending Notices of Proposed Removal and triggering appeal windows at the Merit Systems Protection Board.

The Court did not rule on underlying legality of the executive order, only that the administration was “likely to succeed” in defending it.

Some agencies are opting for voluntary resignations, buyouts, and early retirements instead of forced RIFs, often ahead of schedule to reduce legal exposure.

Why the renewed spike?

On July 8, 2025, the Supreme Court lifted a lower court’s injunction that had blocked Trump's February Executive Order directing agencies to prepare for reductions-in-force (RIFs) under the DOGE initiative.

Howevere, there has been a clear rebound in initial claims by federal employees for unemployment insurance, which surged higher in July.

This coincides with the reference week for the jobs report, so economists should have been forecasting a notable drag from federal layoffs this month.

Consensus expected total job growth of 104k, of which 100k would be private jobs - implying growth of 4k for government payrolls.

One of the big surprises in today's jobs report was the contraction in government payrolls.

The government sector lost -10k jobs, thanks to a -14k decline in Federal workers (non-USPS).

This shouldn't have been a big surprise, but it was to consensus economists...

A quick 🧵
#EconSky

🫡🙏

Headline unemployment (U3) for each age cohort.

I heard an argument that seasonal adjustments were to blame for the job growth slowdown, so let's look at the non-seasonally adjusted data (nsa).

Looks to me like jobs declined by more than normal in July and the pace of job growth is now well below the pre-COVID norm and trending lower.

But wage growth has dropped precipitously for goods producing sectors, which has been in contraction since early '23 as I noted in the diffusion chart above.

Ok, so the economy isn't really adding many jobs at this point, but at least wage growth is still solid, right?

Well, that's generally true for private service industries, where wage growth has been roughly in-line with the pre-COVID avg over the past 6 months...

Lets look more broadly at recent 3-month trends in sector-level job growth ...

It's again clear, nothing looks very "solid" outside of Education and Health Care.

One sector stuck out prominently in the chart above and viewed another way, it is clear:

*All of the recent job growth is currently coming from Education and Health Services alone*

Within private sector employment, manufacturing has been even uglier...

The diffusion indexes for manufacturing have been in contraction territory since early 2023 despite a brief spike earlier this year that subsequently collapsed.

That brings me to my favorite metric from the jobs report: the private job growth diffusion index, which reflects the breadth of job gains across industries.

The 3m index dropped below the 50 expansion / contraction threshold back in May and remained at 46.8 in July, down from 60.8 back in Jan '25.

So, it's clear the labor market is not "solid" when looking under the hood of the household survey, it also doesn't exactly look rosy in the establishment survey.

Job growth has cooled to an average of just 35k over the past 3m from ~130k just back in April and ~230k at the beginning of the year.

It's not just new entrants not being able to find jobs and ending up in the unemployed cohort, workers are increasingly resorting to part-time work as full-time employment has trended lower.

The new entrant / youth unemployment angle is not new, but it is clearly the segment of the labor market feeling the greatest softening in recent months.

That "not in the labor force" segment of the unemployed surged in July as new entrants not finding jobs put 15bps of upward pressure on the headline unemployment rate.

As for the unemployed population, a rising share have come from people previously employed and those who were not recently in the labor force.