First, the bottom line: Cracks in labor market foundation are widening
- A modest uptick in unemployment last month isn’t alarming; the jobless rate has held in a fairly narrow range since the beginning of the year.
- What is concerning is the fact that job creation has slowed to a crawl over the last three months.
- The sharp loss of momentum in job creation will undoubtedly increase the calls for the Fed to cut rates sooner rather than later. It’ll also give investors who have driven equity markets higher in recent months something else to think about as uncertainty surrounding tariffs and trade policy recedes.
By the numbers: Job creation stalling
- Job creation was much softer than anticipated in July, coming in at just 73,000, falling well short of the consensus forecast for 107,000.
- Perhaps more alarming than the softer-than-expected July nonfarm payroll gain was the steep downward revisions to May and June that slashed 258,000 off previously reported monthly gains, dropping the combined total for the months of May and June to a paltry 33,000.
- Those revisions tell a materially different story than had been previously reported. An economy that has created an average of just 35,000 jobs per month over the last quarter is far from robust and at greater risk of stalling completely than prior data would have suggested.
- Despite unexpectedly soft job creation, the fractional uptick in the unemployment rate to 4.2% is still consistent with a labor market that’s relatively balanced, with the jobless rate holding in a narrow range this year.
- Wage growth held relatively firm at 3.9% over the past 12 months and has shown little sign of slippage.
Unemployment firm despite limited job creation?
- On the back of exceptionally weak job creation, the unemployment rate would be expected to rise. The uptick to 4.2% in July isn’t surprising in that context, although the needle has barely moved on the jobless rate over the past six months.
- That’s not the whole story, though. Offsetting a marked slowdown in hiring is a pronounced reduction in the flow of new workers into the labor force. An aging population certainly plays a role, but it’s not a dynamic that shifts the narrative so notably in a matter of months.
- What has changed is the sharp reduction in immigration into the United States in recent months, coupled with the increased focus on enforcement. Many immigrants are undoubtedly more cautious in seeking work, while employers that may have historically been more willing to hire workers lacking permanent legal status are similarly hesitant to do so.
- Setting aside the political debate over immigration policy and enforcement, the tangible effect of those policies is playing out in real time and weighing heavily on labor force growth and job creation.
- Immigrants had accounted for a significant portion of labor force growth and hiring in recent years. With that source of workers slowing to a trickle, the impact of the sharp reduction in the pace of hiring on the unemployment rate has been comparatively muted to this point.
- Whether or not the July jobs report and significant downward revisions to prior months is enough to tip the scales for the Fed to cut rates at or before its September meeting remains to be seen.
- Fed Chair Jay Powell’s comments earlier this week characterized labor market conditions as “quite solid,” while also indicating that policymakers would need to see a more pronounced weakening in inflation or labor conditions to cut its short-term policy rate. With this new data, that assessment appears likely to be toned down as well.
- Whatever the specific threshold that the Powell Fed may have in mind, the surprising weakness of the July jobs report not only raises the stakes but pushes the probability needle for a September rate cut higher.
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