Key Highlights

  • US employment fell for a fourth consecutive month in July, but Unemployment claims and job-opening ratios remain near pre-pandemic strength, pointing to a supply-side rather than demand-side shift.
  • America's labor force is 1.3 million workers smaller than a year ago even as employment is more than 300,000 workers higher over the same period.
  • Retail sales declined in July for a second consecutive month, but consumer spending's contribution to GDP growth has fallen roughly 50 basis points since 2022 as interest rates rose.
  • Corporate and government borrowing have outpaced household borrowing since 2022, with AI-related corporate Debt issuance increasingly competing with consumers for capital.

Job Growth Slows as Labor Supply Contracts

The US labor market showed renewed softness in July, with the latest jobs report erasing more than 100,000 previously reported positions and showing an outright decline in employment for the month. Employment growth has now fallen for four consecutive months.

Other measures of labor market slack tell a different story. The ratio of unemployed workers to Job openings has held steady near 1.0 for two years, a level considered strong relative to pre-pandemic norms, while claims for unemployment insurance remain low and stable.

The weaker hiring numbers appear tied to a shrinking labor force rather than falling Demand for workers. The civilian labor force is 1.3 million workers smaller than a year ago, even as the level of employment is more than 300,000 workers higher over the same period. Demographic shifts and an estimated 50,000 deportations per month have contributed to the tighter labor supply.

Consumer Spending's Share of Growth Has Declined Since 2022

Retail sales fell in nominal terms in July, marking a second consecutive month of deceleration only partly explained by lower fuel prices. Consumer spending has historically driven close to three-quarters of US economic growth since the pandemic, but its contribution has declined by roughly 50 basis points since central banks began raising interest rates in 2022.

Household debt as a share of GDP has fallen from nearly 63% to under 58% over that period, even as federal government borrowing rose from 103% to 108% of GDP. Corporate borrowing, which initially declined as rates rose, has resumed climbing in the first half of 2026 as AI-related infrastructure Investment accelerates.

The shift suggests consumers are increasingly being outbid for Capital by government and corporate borrowers rather than pulling back due to job losses, with higher interest rates the primary mechanism crowding out household spending.

Rate Pressures Tied to Real Yields, Not Inflation Expectations

Yields on 10-year and 30-year US Treasury bonds have risen close to 70 and 60 basis points, respectively, since the start of the Iran war. Break-even inflation rates have remained largely unchanged over the same period relative to pre-war levels, suggesting the rise in nominal yields is being driven primarily by higher real yields rather than inflation expectations.

Equity market indices remain at or near all-time highs, and financial conditions have loosened in recent months despite the higher rate environment. The combination points to an economy constrained more by supply limitations in labor, AI infrastructure inputs, and loanable savings than by weakening demand.