Macro Consensus Challenger: Balanced Weaknesses in Labour Demand and Supply

Summary

• NFPs were higher than expected but half of the increase came from the government sector, with private NFPs below expectations.
• June’s labour supply continued weakening following the end of the immigration surge.
• Labour demand and supply weaknesses roughly balanced out with the unemployment rate 12bp lower.
• Wage growth slowed further, which made for slower growth in real wage income and could eventually add to downside risks to consumption.

Market Implications

• I still expect two-three Fed cuts in 2025 in line with market pricing but only one cut in 2026, below markets pricing about two cuts.

NFP Surprises on Upside but Details Weak

Current equity and rates markets pricing of the US economic outlook are only consistent under a Goldilocks macro backdrop. Yesterday’s employment report superficially looks like a Goldilocks print with a positive NFP surprise and a negative wage surprise.

Actually the print shows demand and supply weaknesses inconsistent with equity markets’ cheery outlook.

As Sam’s model predicted, June payrolls surprised positively at 147k versus 106k. consensus (Chart 1). However, half of the increase came from government employment and private payrolls at 74k, which were below expectations of 100k (Chart 2).

While federal government employment is down 69k. from January’s peak, state and local government employment has increased by 56k. over the same period (Chart 3).

Furthermore, private sector gains were concentrated in two sectors, health and leisure and hospitality.

Most importantly, NFPs continued trending down on a 6mma basis.

Household survey (HH) employment increased by 96k and by 751k when adjusted for payroll survey definitions (Chart 4). HH survey data remains out of sync and noisier than payroll data.

Chart 1: NFPs Still Trending Down	Chart 2: Job Gains Still Highly Concentrated
Chart 3: S&L Government Up Federal Government Down	Chart 4: HH Survey Employment Noisy

Labour Supply Contracts

The labour force contracted by 62k. following May’s 541k. expansion, partly reflecting HH survey data issues (Chart 5). Nevertheless, the survey shows the negative impact of the end of the immigration surge on labour supply (Chart 6).

Participation was 10bp below expectations at 62.3% and remained on a downward trend (Chart 7). This aligns with the decline in the share of migrants in the labour force as their participation is higher than that of native workers (Chart 8).

Chart 5: Labour Force Fell	Chart 6: Immigration Surge Is Over
Chart 7: Participation Still Falling	Chart 8: Falling Migrant Labour Force Share

Labour Supply and Demand Weaknesses Balance Out

Unemployment fell 0.1ppt to 4.1%, below expectations of 4.3% (Chart 9). Though both narrow (U3) and broad (U6) unemployment were stable on a 3mma basis. The spread of minorities unemployment over white unemployment was mixed. The African American spread increased while the Hispanic spread decreased (Chart 10).

Continuing unemployment claims and the Richmond Fed’s recession indicator, which is based on the insured unemployment rate, both rose over the past month, though the indicator remains far from the recession trigger (Chart 11)

The job finding rate rose but remained well below pre-Covid levels (Chart 12). This partly reflects lower labour market flows post-pandemic (Chart 13). However, labour market flows could be about to accelerate, which would signal the labour market is easing.

Lastly, hours worked were marginally below expectations but stable on a 3mma basis (Chart 14). Post-Covid weekly hours worked are shorter, but this largely reflects workers preference for part-time work.

Chart 9: Stable Unemployment	Chart 10: Minorities Unemployment Mixed
Chart 11: Continuing Jobless Claims Are Rising	Chart 12: Job Finding Rate Marginally Up
Chart 13: Low Labour Market Flows	Chart 14: Stable Hours

Weaker Wage Growth

Average hourly earnings growth slowed further, aligning with the ECI (the Fed’s preferred wage measure) that adjusts wages for changes in the composition of the workforce (Chart 15). The Q1 ECI will be released on 31 July.

Slowing nominal wage growth could reflect a weak labour market and/or expectations of continued disinflation (Chart 16).

Aggregate wage income growth (i.e., wages times NFP and weekly hours) fell in June, suggesting limited upside to disposable income growth and consumption (Chart 17).

Wages also show the challenges the Trump administration faces implementing its policy agenda. Low wages continue underperforming high wages, a trend the administration wants to reverse (Chart 18).

Manufacturing wages underperformed the services sector in June, which is unaligned with the administration’s manufacturing revival plans (Chart 19). However, since 2023 manufacturing wages have been reversing their previous decline relative to services wages.

Raising the real wages of low-income Americans would likely require an increase in the income share of workers, which remains at post-WWII lows (Chart 20).

Chart 15: Wage Growth Slowed Further	Chart 16: Real Wage Growth Has Been Stable
Chart 17: Slower Wage Income Growth	Chart 18: Low Wages Continue Losing Out
Chart 19: Weaker Manufacturing Wages	Chart 20: Wage Share at Post-WWII Low

Market Consequences

Overall, yesterday’s data suggests slower employment growth, inconsistent with the earnings recovery equity markets expect. Also, weaker wage growth indicates stronger demand than supply weaknesses, which supports continued disinflation and further Fed easing.

Chair Powell has made it clear the Fed intends to wait and see over summer to gain confidence that the impact of tariffs on inflation will be limited. Yesterday’s print is unlikely to change this strategy. It confirms Powell’s view that labour demand and supply are slowing in sync, which is keeping the labour market balanced. Therefore, I still expect two-three cuts in 2025, starting in September. This is above market pricing down to two cuts after yesterday’s data.

By contrast, in 2026 I expect labour supply weaknesses to intensify, aligning with the end of the surge in immigration earlier this year. By contrast, a fiscal stimulus representing about 1ppt of GDP will support aggregate demand. This could translate into inflation stabilisation so that even under a new, more dovish Chair, the Fed appears unlikely to cut more than once. By contrast, markets are pricing 2.5 cuts.

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