First Friday: We Were Wrong About 258,000 Jobs (This Changes Everything)

0:00Today is Friday, August 1st. It's the deadline to set trade deals for tariffs and the markets are in turmoil. On top of that, we have a new jobs report and the Fed met earlier this week, two days ago, and we have new GDP report numbers. Plus, we have the latest inflation data from the PCE index, the Personal Consumption Expenditures Index. We've got a lot to cover. By the way, everything that I've just named happened in the last 48 hours. Everything. The PCE numbers, the GDP numbers, the jobs report. Today, the tariffs went out. Today, the Labor Department put out the jobs report. A significant amount of it is happening literally today.

0:35Whew, buckle up, we got a lot to cover. Welcome to the Afford Anything Podcast, the show that knows you can afford anything, not everything. We are a twice a week show. Typically on Tuesdays, I answer questions from you. And on Fridays, we normally interview a guest, but there's one exception, and that is the first Friday of the month. Every month on the first Friday, we pause our typical Q &A interview cadence and instead take a look at the big, broader macroeconomic sphere? What's happening in our economy? What does the data show? Where are we headed? Those are the questions we answer on the first Friday of every month.

1:13And so welcome to the August 2025 First Friday Economic Update. Let's start with the jobs report. In the month of July, the U.S. gained 73 ,000 new jobs. According to the BLS, quote, employment changed little in July, again, with a gain of only 73 ,000 new jobs and, quote, has shown little change since April. So jobs are holding steady according to BLS data. The unemployment rate is also holding steady at 4.2%. It's been very stable at that rate for years now. The thing that's shocking about the jobs report are the revised jobs numbers. So it isn't the jobs numbers from July that are particularly noteworthy, it's the revisions from May and June.

2:02As it turns out, we added 258 ,000 fewer jobs than we thought we did. So according to the revised numbers, the U.S. added only 19 ,000 new jobs in May as compared to an initial report of 144 ,000. We added only 14 ,000 new jobs in June as compared to an initial report of 147 ,000. And so if we take the July numbers at face value, because that's the best we know right now, even though it's standard practice that numbers are revised, and by the way, revisions happen in both directions. Revisions happen up and down, but May and June just got revised down in a big, big way. So if we take the revised May and June numbers and we add it to the July numbers, that means that over the last three months, the U.S.

2:52has added only 106 ,000 new jobs. That's actually shocking. Let me put those numbers into context. We thought that in the month of May alone, just the month of May alone, we thought that we added 144 ,000 new jobs. In fact, now that we have revised numbers, assuming that we believe the July numbers, assuming we take those at face value, we added fewer jobs over the last three months than we thought we added in just the month of May. And by the way, I'm not singling out the month of May. You could say the same thing about the month of June, right? We thought that we added 144 ,000 jobs in May. We added 19 ,000.

3:36We were off by a factor of most of the jobs. And the same thing is true of June. We thought we added 147 ,000 jobs in June. we only added 14 ,000 new jobs. We were off by a factor of most of the jobs. Once again, the revisions really shake up what we thought we knew about the labor market. We are starting to see more data around federal government job losses. Remember, if someone in the federal government was let go, but they're still collecting severance, those numbers don't show up in the jobs report. Those don't qualify as job losses until the severance runs out. And so back in March, April, May, we actually were not technically seeing a lot of job losses in the federal government sector.

4:24Now that's starting to pick up. And if you go back and listen to the first Friday episodes that I recorded back in March, April, May, I talked about how it's going to be later in the year, probably around the fall, probably around August, September, October, when we're really going to start to see what those numbers actually look like. We're beginning to see it right now. As of July, federal government employment declined by 12 ,000 jobs, and it's down by a total of 84 ,000 jobs since its January peak. And again, I'm going to emphasize employees that are on paid leave or employees that are receiving severance are still counted as employed.

5:04So we'll need to wait a few more months to get better numbers on that. Now, as usual, the healthcare sector is where the jobs are. Healthcare added 55 ,000 jobs in the month of July. That's more than what it usually does. Its average monthly gain is 42 ,000 jobs per month over the past 12 months. Social assistance employment also ticked up in July. That's a continuation of a longtime trend that we've seen. So social assistance employment grew by another 18 ,000 jobs. Meanwhile, a whole bunch of sectors, including mining, quarrying, oil and gas, construction, manufacturing, wholesale trade, retail trade, transportation, warehousing, information, financial activities, professional and business services, leisure and hospitality, all of those sectors remained flat.

5:52Labor force participation is also holding steady, although it's down half a percentage point from where it was a year ago. But on a month-over-month basis, it's holding steady. So zooming out big picture, we're essentially seeing a lot of flatlining, with the exception of healthcare. They're doing great. That's all according to BLS data, but we get a different picture when we look at the ADP report. All right, so some background. If you missed last month's First Friday episode, here's the deal. The BLS, the Bureau of Labor Statistics, they take a view of the entire employment landscape, both private and public.

6:26By contrast, ADP, which is a payroll processor, they have a bunch of data only on private employment, the private sector. They don't see any public sector data. And so they both put out employment reports every month. And every month, sometimes they're the same. But lately, last month, if you remember last month's First Friday, last month they were really different. and sometimes seeing the differences between the two reports. So what does the job situation look like when we're looking only at the private sector versus what does the job situation look like when we're looking at both? And obviously, they're two different groups with different data sets and different methodologies, right?

7:12So by virtue of having these two very different types of jobs reports, we get a fuller picture, a fuller example. All right, so the ADP report is also out for the month of July. They spotted more jobs than the BLS is reporting. They say private sector employment is up by 104 ,000 jobs in July. And they actually saw growth in both service providing and goods producing companies, although service providers led the way a bit more. So financial activities had some of the biggest growth. Trade transportation utilities, again, in the private sector, had some of the biggest growth. Construction did well.

7:51Leisure and hospitality did well. with the addition in leisure and hospitality of 46 ,000 new jobs. And in their report, they lump education and health services together into one category, and they saw a decline there of 38 ,000 jobs. If we parse the data, I would bet that would largely come from education. So the ADP report, which is produced by looking at weekly payroll data from 25 million private sector employees in the U.S., That report paints a rosier picture. It shows many of these sectors having more growth than the BLS report would otherwise indicate. But there is one big area of concern, and that's when you look at how this breaks out between small and large companies.

8:40Medium-sized businesses, which have anywhere between 50 to 500 employees, showed good growth, 46 ,000 new jobs in the last month. Large companies, which are 500 employees or more, also great growth, 46 ,000 jobs. But small companies with fewer than 50 employees, those small businesses are where we really saw the lag. And that reflects ADP's data from the month of June as well. Some of the economic pressures that we're seeing right now seem to be disproportionately affecting small businesses, defined as any company with fewer than 50 employees. Overall, the picture, I mean, if we look at both reports together, we're seeing a picture of an economy that's resilient.

9:24Consumers are still spending. Unemployment is low. Labor force participation is steady. Wages are growing. But there are nuances between the two reports, particularly around small business, where we see what some of those weak points are and where there's trouble in the system. Today was the negotiation deadline for tariffs. Many countries did reach deals prior to today. South Korea, for example, reached a trade deal yesterday that gave them 15 % tariffs, down from the 25 % that was originally looming. They'll also be investing$350 billion in U.S. projects. And they'll be buying$100 billion worth of U.S.

10:07energy products. The deal with South Korea is particularly notable because they're one of the U.S.'s top 10 trading partners. The U.S., of course, has many troops stationed in South Korea. They are a key Asian ally. But there are other countries in Asia and elsewhere that did not manage to make deals prior to today, including India. And so a 25 % tariff on India will be going into effect today, unless they reach a deal like later this afternoon. As of early Friday morning, no deal has been made with India. Those trade talks are still under negotiation. That's as of 9 a.m. Eastern on Friday. Meanwhile, Brazil is facing 50 % tariffs.

10:525 ,0. So that's the highest of anything. That does, I should note, exclude some of Brazil's key exports. So it excludes orange juice, energy products, and commercial aircrafts. It does not exclude things like coffee or beef, which we import a lot from Brazil. So there is a reasonable chance that we might start seeing higher prices on those products. I mentioned in a previous First Friday episode that President Trump had also threatened 50 % tariffs on Lesotho. They are the country with the biggest trade imbalance with the U.S. That has ended up being a 15 % tariff. Meanwhile, with China, one of the tricky things that the administration has had to navigate is that China often bypasses tariffs and other measures by setting up warehouses and factories in other countries.

11:46So China will frequently route their goods through Vietnam, through Mexico, through a variety of Southeast Asian countries in order to bypass U.S. tariffs. Yesterday, President Trump decided to take aim at those indirect imports by imposing 40 % tariffs on those types of imports. He refers to them as transshipments. Those are set to go into effect in a week. Zooming out and looking more broadly, you know, with today being the deal deadline, most of the deals that have been reached, the countries with whom we are now trading at a negotiated deal rate, are predominantly countries in Europe or in East Asia slash Southeast Asia.

12:30So we are trading at a deal rate with Britain, with the EU, with Japan, South Korea, Vietnam, the Philippines, Indonesia. We've cut deals with all of them. Meanwhile, we have new tariff rates imposed on a huge variety of major trading partners. Canada has a 35 % new rate. India, as we already discussed, has 25%. Some of the deals that have been made, you know, Taiwan, Sri Lanka, Vietnam, they're going to see tariffs of 20%. And then there are a number of countries that are only going to face the standard 10 % baseline rate. So Peru, Morocco, Egypt, Ukraine, Singapore, they'll all face the standard 10 % baseline rate.

13:15I say baseline, but that's our baseline for everywhere in the world with the exception of China. China has a baseline of 30 % based on an agreement that we reached in May. But the deadline for that is August 12th, by which time we have to either come to a new deal or extend that deadline. And all of this is on top of industry-specific tariffs, which include 50 % on steel, aluminum, and copper parts, and then 25 % on autos and auto parts. Meanwhile, there are a handful of other industries, lumber, pharmaceuticals, semiconductors, that are likely to see industry-specific tariffs, but they haven't been determined yet.

13:57it's notable the number of deals that have not yet been reached, particularly given that many of those deals are with our biggest trading partners. We have not reached deals with Canada or Mexico. Mexico, there's an additional 90-day pause for us to negotiate that. With Canada, their new rate of 35 % goes into effect immediately. That's notable because trade is two-thirds of economic activity in both Canada and Mexico. And so there is a chance that the trade war with Canada could trigger a recession in Canada. Now, as for what impact all of this is going to have on the U.S. economy, that remains to be seen.

14:32If prices of goods go higher, that might slow down consumer spending, and consumer spending is the massive driver of the U.S. economy. The goal of the tariffs is, of course, to reduce our trade deficit with other nations, as well as to re-onshore some manufacturing. All of that remains to be seen. Historically, it's taken one or two years. In past instances, when we've imposed tariffs, it's taken one or two years for the effects to really trickle through the supply chains and then play out in meaningful ways. When you're working at such scale with such big economic data, imagine trying to steer a massive cargo ship.

15:11The turn is slow. And yes, it's true that even slight degrees, a one degree difference over time completely changes the trajectory. But in the short term, that term is slow, nearly imperceptible. And so that's very much like how some of these trade deals play out in the ripple effects as they reverberate across sectors. Six months from now, with hindsight, we'll be able to look back on today and say, hey, remember those tariffs that went into effect on August 1st? This is how the economic effects played out from that point forward. But in the moment, there's a lot of uncertainty and there's a lot of speculation.

15:52And that actually leads perfectly into our next segment, the stock market, because the stock market in the short term is a voting machine and in the long term is a weighing machine. And so what I just talked about, weighing the economic effects, That's the long term. That's the actually stepping on the scale and taking the weight. But in the short term, on a day-to-day fluctuation level, the stock market is a voting machine reflective of hopes, fears, anxieties, aspirations. On a day-to-day basis, the stock market reflects that, those emotions and that speculation. The volatility, the daily volatility of the market reflects the straw poll rather than the scale weight.

16:40And so today, the markets are not doing that well. I recommend you don't take a look at your 401k, at least as a Friday morning. By the time you listen to this, who knows how it might change. But as of Friday morning, stocks are down. The S &P 500 is down about one and a half percentage points. Treasury yields have fallen to their lowest rate since last August. That means prices are up. But stocks are down, treasury yields are down, and the dollar sank. Oh, and the VIX, which is like the fear, a measure of fear on Wall Street, the VIX is up. I should note part of why the dollar sank is because the markets, especially in the context of the weak jobs report, the markets are now pricing in two rate cuts this year, which is good news for anybody who wants to buy a house or anybody who's selling a house, really.

17:30Because if you're selling a house right now, you're not finding many buyers on the market because of the fact that interest rates are high. Based on the weak jobs data, the markets are now pricing in two rate cuts for the remainder of 2025, which means, and technically rate cuts do not determine mortgage interest rates. I want to put that caveat out there. It's the 10-year yield that determines mortgage interest rates, not the Fed's interest rates itself. The Fed's interest rates are simply the overnight lending rate. But if we look at the Fed's interest rates as a proxy, a directional guideline as to where mortgage interest rates will head, we're expecting now, based on the weak jobs data, two rate cuts, which means it looks likely that by the end of the year, you can borrow money to buy a home, possibly at a cheaper rate than you can right now.

18:27And that's good news for both sellers, because there aren't a whole lot of buyers on the market right now, and it's a good news for buyers for obvious reasons. So that is your good news. The irony is that the Fed's been under a lot of pressure to cut rates, and they didn't do it at their last meeting. They made that announcement on Wednesday. And with the data that came out this morning, that seems to be a mistake. At least I think you could make a strong argument that that might have been a mistake. And so the markets are now pricing in near certainty that the Fed's going to cut rates at their next meeting in September.

19:07And I think the only question is, is it going to be a quarter of a percentage point or is it going to be half of a percentage point? On the other hand, let's just make the counter argument. On the other hand, I can imagine Fed governors saying, wait a second, we don't know what the inflationary impact of tariffs are going to be. So despite the jobs report data, is it prudent to lower interest rates when we don't know the effect of tariffs? You can see why there's dissent in the Fed right now. It's actually, particularly with this morning's new jobs data, it's a tough time to be a Fed governor, which is to say it's a tough time to know which is the right decision.

19:51Do we brace for the possibility of higher inflation or do we spur the labor market to create more jobs? We will know on September 16 and 17, which is the next time the Fed meets. But right now, as of this morning, investors are betting that the Fed is going to move to improve the labor market by virtue of cutting rates. And that is why the dollar is weakened. We're going to take a break to hear from the sponsors who make the show possible. And when we return, we'll talk more about home sales, which are at their slowest pace in 30 years, as well as the return of meme stocks. Yeah, meme stocks are a thing again.

20:30But before we get to that, we've got some mixed news about the economy that comes from the GDP numbers. We're going to dive into those. We're also going to talk about the inflation numbers that comes from the PCE report. And we're going to talk about drama in the Fed governors and why there's a new culture of dissent that we haven't seen in 30 years. All of that is coming up after this. The kids are back in school now, and I finally have some extra time to plan a weekend getaway for just us. We've been wanting to visit Lancaster County, Pennsylvania for a while now because I've heard so many people rave about it.

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23:41There's good news, but kind of mixed news for the economy. And it comes from the Bureau of Economic Analysis, the BEA. They are an agency inside of the Department of Commerce. And they put out a report on the 30th, on Wednesday, that found that real GDP rose at an annual rate of 3 % in April, May and June. That's a big deal for two reasons. Number one, it's a big improvement over how we performed in the first quarter. So in January, February, March, GDP decreased by one half of a percentage point. So to go from a slight decrease to a 3 % annual rate increase is a huge swing. That's a big improvement from the preceding quarter.

24:23That's one of the two reasons it's notable. The other reason it's notable is because if you compare the U.S.'s performance to other developed nations, It's a standout winner. Europe has mostly flatlined and Germany has actually declined. Now, if we dig into the GDP numbers, the picture gets a little more nuanced. So there are two reasons why GDP rose in the second quarter. One is an increase in consumer spending, which is great. Great for the economy. We love to see it. Consumers spend when they have discretionary money and when they feel confident. When consumers spend, businesses make more profits.

25:00State and local governments collect more sales tax. Everybody's a winner. But that was only one of two reasons why GDP rose. The other reason is because of a decrease in imports. So the way that GDP is calculated is consumption plus investment plus government spending plus exports minus imports. That's the formula for GDP. And since imports are subtracted when we're calculating the GDP, a decrease in imports likely from the trade war and tariff uncertainty plays a role in boosting our GDP numbers. Now, this could overall be a positive sign because if imports are down, but consumer spending is still high, domestic production has to fill that demand.

25:45But remember, if you think about that entire formula that I just outlined, consumption plus investment plus government spending, plus exports minus imports, right? What we saw in the last quarter is that consumption rose, but there was a decrease in investment. In fact, there's a particular metric. It's called real final sales to private domestic purchasers. That's the C plus I, right? That's consumer spending plus gross private fixed investment. In the second quarter, that rose by only 1.2%. That's a decrease from 1.9 % in the first quarter. What that reflects is that investors are a little bit leery.

26:25Investors are worried and playing it cautious, likely as a result of some uncertainty going on right now. There's also one other part of this report that I want to draw out, and it's the Personal Consumption Expenditures Price Index. As we've talked about on a few other First Friday episodes, there are a few different ways that we can measure inflation. One of those ways is through what's called the CPI, the Consumer Price Index. And in fact, the CPI has two different types of numbers, headline CPI and core CPI. We can get into that later. But for right now, I want to focus on the third way that we look at inflation, an alternate way of looking at inflation, and it's through the PCE index, the Personal Consumption Expenditures Price Index.

27:08Part of the reason that we look at both is because these are separately derived from different agencies. So the PCE is developed by the BEA, the Bureau of Economic Analysis, which is part of the Department of Commerce. By contrast, the CPI is developed by the Bureau of Labor Statistics, which is part of the Department of Labor. And so by looking at both indices, we get to see different calculations that are produced independently by two completely different departments. Not just different agencies, but agencies under different departments. And of course, both use different methodologies, different data sources.

27:48So we get a much more well-rounded picture. Now, the Fed, the Federal Reserve, they actually prefer to use the PCE as their inflation gauge, even though in the popular media, we tend to focus on CPI. And part of the reason for that is because CPI is used when Social Security is making its cost of living adjustments. So with all of that said, with that groundwork laid, that introduction, The question now is, what did the BEA discover when they calculated the PCE? Is it good news or bad news? It's good news. In the second quarter, the PCE rose by 2.1%. That is almost perfectly at the Fed's target 2 % rate, and it's a huge improvement over the 3.7 % that we saw in the first quarter.