There is a season (turn, turn, turn)
Last week’s headlines centered on reported peace progress on the Iran war front and an unexpectedly weak July payroll report. The combination strengthened the bid for Treasuries, as investors questioned whether the Federal Reserve still had enough reason to remain hawkish. The Bureau of Labor Statistics also announced an unexpected decline of 23,000 nonfarm jobs in July, which is well shy of the 80,000 expected. Moreover, June and May numbers were revised down by a combined 103,000 jobs, pushing the three-month average nonfarm job gain to a paltry 20,000. After the announcement, news outlets quickly pointed to rising prices and uncertainty from the Iran war as a likely culprit for the weakening economy and, in turn, as a reason why the Fed might delay interest-rate hikes. However, when viewed more closely, the employment report was better characterized as mixed, with seasonal distortions and demographic shifts complicating the recessionary interpretation. Indeed, The Byrds, a band from the 1960s famed for their angelic harmonies, may have been spot on when they sang: “To everything (turn, turn, turn), there is a season (turn, turn, turn).”
Though last Friday’s Bureau of Labor Statistics (BLS) report signaled softness in the labor market, it was not uniformly weak. For example, goods-producing sectors, construction, manufacturing, healthcare and temporary help showed pockets of resilience. Other sectors—such as the retail trade, financial activities, leisure and hospitality, and government payrolls—accounted for the bulk of the drag.
With revisions included, recent months have clearly softened, but the broader picture is less one-sided. For instance, the six-month diffusion index, which measures the share of industries adding jobs, has improved in five of seven reports in 2026 and now sits above the 50% expansion threshold at 55%. This suggests that the labor market has cooled, but also that sector breadth has not yet collapsed.
As Figure 1 shows, the leisure and hospitality sector lost 40,000 jobs in July, which naturally invited concern that higher inflation, geopolitical uncertainty, and softer consumer activity were beginning to weigh on labor demand. That said, the recent pattern is uneven: The sector also lost 43,000 jobs in June, after gaining 42,000 in May and 44,000 in March. Some of the weakness may therefore reflect timing effects around summer hiring and event-driven demand, including bar and restaurant staffing that appears to have increased ahead of the FIFA World Cup and that unwound after the tournament ended. Tangentially, local government employers shed 57,000 jobs, with 50,000 coming from local education. Presumably, these teachers will return again as the school year begins.
Nevertheless, the labor market has clearly slowed over the last couple of years (Figure 2). That is not unusual in a late-stage expansion, when new openings are increasingly constrained by a smaller pool of available applicants. As the cycle matures, employers may also become more selective, leaving some open roles unfilled, rather than hiring candidates who do not fully meet requirements. The result is a payroll slowdown that can look recessionary in the headline data even before broader labor demand has unequivocally broken.
Some of the reduced need for employees has been attributed to the productivity gains related to artificial intelligence (AI). While total unemployment ticked down from 4.2% to 4.1%, the decline did not necessarily a signal broadening strength because labor force participation also moved lower.
According to the BLS, the highest rate of employment occurs in the youngest pool of available labor. At first glance, this makes sense because young people are most likely to compete with the entry-level expertise that AI has provided. History suggests, though, that this cohort is actually nearing its lowest level of employment in nearly 20 years, even though employment among young people was already under pressure in the post-pandemic period.
One of the notable features of this latest employment report was the large consecutive drop in the labor force (Figure 4). Recall that the labor force includes people who are employed, plus those who are unemployed but are actively looking for work. A falling participation rate can push the unemployment rate lower even when labor-market momentum is weakening.
A falling participation rate, as seen today, can be negatively interpreted as weak job opportunities that permanently discourage workers; it may also be more positively interpreted as a population that is, for example, just retiring, returning to school, staying home to care for family, or facing health issues. While AI-related displacement may be part of the story over time, the more concrete near-term explanation is demographic: a large Baby Boomer cohort continues to age out of the labor force, while immigration, legal and illegal, is at decade lows.
The initial market reaction to the “soft” headline payroll report was bullish for Treasuries, with the 10-year note yield declining by six basis points. However, the rest of the session brought a steady retracement, likely because investors looked past the headline payroll decline and focused on the more mixed underlying details.
There will come a time when employment opportunities dry up and payrolls enter a clearer downturn, as every expansion eventually does. For now, July looks less like an unambiguous recession signal and more like a late-cycle labor report complicated by seasonality, sector noise, and demographics.
As for The Byrds, they close out their famous track with a prescient message for the labor market (and, perhaps, the U.S. Department of War). “[There is] a time to gain, a time to lose … a time for peace, I swear it’s not too late.”
FROM THE DESK
Agency CMBS — Volumes were fairly light for the week and there were no material changes to the commercial real estate story. Fannie spreads were flat to one basis point tighter, while Ginnie spreads were flat to biased wider, week over week.
Municipals — AAA tax-exempt yields moved lower across the curve this week, reversing several weeks of rising rates. The municipal market entered August following one of its weakest July performances in more than two decades, as investors struggled to absorb approximately $54 billion of new issuance last month— versus a recent historical average of roughly $32 billion. Higher Treasury yields also weighed on performance, despite the seasonal boost from July coupon and redemption reinvestment cash flows. Municipal bond mutual funds recorded $1.3 billion of inflows during the week. High-yield municipal funds received $530 million of those inflows.
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