July Jobs Report Preview: Modest Gains Expected as Fed Watches Unemployment Rate Closely

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The July U.S. jobs report, due out Friday at 8:30 a.m. ET, is expected to show a net gain of 106,000–115,000 jobs, marking another step down from June’s 147,000 increase. The unemployment rate is forecast to tick up to 4.2% from 4.1%, while average hourly earnings are expected to rise 0.3% month over month. The report takes on added significance after Fed Chair Jerome Powell, in yesterday’s press conference, specifically pointed to the unemployment rate as a key factor in policy decisions. With the market now assigning just a 40% chance of a September rate cut—down sharply from over 60% earlier this week—Friday’s data could further shape expectations for the Fed’s path through the rest of 2025.

Key Metrics to Watch The headline numbers—nonfarm payrolls, unemployment rate, and wage growth—will drive market reaction, but the composition of job gains will be just as important. Consensus projects 106,000 new jobs, a slowdown from the first half’s average of about 133,000. The unemployment rate’s rise to 4.2% is modest, but Powell highlighted it as critical context for Fed policy. Average hourly earnings are expected to climb 0.3% from June, lifting annual wage growth to roughly 3.8%—still well above the Fed’s comfort zone given its 2% inflation target.

Economists are also watching the labor force participation rate, which slipped earlier this summer. A softening in participation could make the unemployment rate’s signal less reliable. Meanwhile, the average workweek is expected to hold steady at 34.2 hours, a sign that employers are holding labor steady even if hiring slows.

Sectoral Drivers and Drags

• Education and Government: June’s outsized gain of 63,500 jobs in state and local education is expected to reverse, subtracting from July’s total. Analysts caution this may have been a seasonal quirk rather than a true hiring spree.
• Health Care: Remains a reliable engine of growth, though likely weaker than June’s 39,200 gain. Hospitals and providers face budget pressures amid federal spending cutbacks.
• Construction: Expected to add around 30,000 jobs, primarily in non-residential infrastructure projects. Residential building remains weighed down by high mortgage rates and affordability concerns.
• Manufacturing: Likely to remain a drag after losing 7,000 jobs in June. Auto plants have been particularly hard-hit, shedding over 26,000 jobs in the past year as tariffs push input costs higher.
• Restaurants & Leisure: Hiring has slowed sharply, with real spending in restaurants flat since December. July is expected to bring little improvement.
• Technology & Private Education: Ongoing weakness continues in research, higher education, and some white-collar services as firms cut back in response to tariff-driven costs and budget shortfalls.

How the Labor Market Has Trended in 2025 Through June, monthly job creation has ranged between 102,000 and 158,000, putting the year-to-date average at about 133,000. That’s close to the breakeven level needed to keep unemployment stable, but it’s also the weakest January–June pace outside the 2020 pandemic recession since 2010. While the economy posted a trade-distorted 3% GDP growth rate in Q2, underlying growth is closer to 1%.

The slowdown has been by design in some respects. Immigration curtailments have reduced labor force growth, meaning the economy now needs fewer jobs each month to hold unemployment steady.

Wage growth has also slowed. After running at a 4% annual pace through 2023–24, average hourly wages are now growing closer to 3.2% on a three-month annualized basis. That moderation, coupled with higher tariff-driven inflation, has dampened real wage growth and could weigh on consumption.

The Fed’s Lens The Fed left rates unchanged on Wednesday, with Powell signaling a more cautious stance on September. Market odds of a rate cut have dropped to about 40%, with the chance of no rate cuts at all in 2025 climbing to 15%—up from nearly zero just a month ago. The uptick in unemployment, if confirmed, may not be enough to sway policymakers if wage growth remains firm.

The Employment Cost Index, released earlier this week, underscored those concerns. It rose 0.9% in Q2 versus 0.8% expected, with wages up 1% and benefits up 0.7%. That suggests employers are still contending with cost pressures even as hiring cools.

Initial jobless claims for the week ending July 26 ticked up modestly to 218,000, while the four-week average fell to 221,000. Continuing claims remained unchanged at 1.946 million, hovering near a multi-year high. This suggests that while layoffs aren’t spiking, displaced workers are finding it harder to re-enter the labor force.

Bottom Line Friday’s July jobs report comes at a pivotal moment for monetary policy. Expectations are for modest job gains, a small rise in the unemployment rate, and steady wage pressures—enough to show the economy remains resilient, but not enough to justify imminent Fed easing. With Powell explicitly pointing to the unemployment rate as a key marker, the July data could either reinforce the case for patience or revive speculation of a year-end cut. Either way, the slowdown in job growth highlights an economy that is cooling—but not cracking.