NFP Review: Mixed Release but Labour Market Remains Solid

Summary

• August employment data was mixed. Payrolls missed and July was revised down but unemployment fell and wage growth accelerated.
• However, detailed data analysis shows a still tight labour market.
• The tightening of the border since June could explain the combination of slower NFP growth and lower unemployment, and the acceleration in wage growth.

Market Implications

• I continue to expect the Fed to cut 25bp in September.

Mixed Employment Release

The August employment report was mixed. NFP was 143,000, 23,000 below expectations and July NFP was revised down 25,000 to 89,000.

By contrast, indicators of the balance between demand and supply pointed at a tighter labour market than in July. The unemployment rate at 4.2% was 0.1% below July, in line with expectations, and wage growth at 0.4% was 0.1ppt above expectations and 0.2ppt above July.

That said, NFP growth has clearly slowed. The 3mma is 114,000 and the 6mma 164,000, compared with a 2019 average of 166,000 (Chart 1).

Household (HH) survey employment increased 168,000 but the overall gap between payrolls and household survey, even when the latter is adjusted for payroll definitions, remained wide (Chart 2). This likely reflects undercounting of immigrants in the Census Bureau’s population estimates.

However, data details suggest the labour market remains tight.

Labour Market Remains Strong

Details from Friday’s release and last week’s JOLTS and jobless claims paint the picture of an overall resilient labour market.

Jobless claims have been falling (Chart 3). The ratio of continued jobless claims to the labour force is roughly equal to the insured unemployment rate and has remained constant since mid-2023. Most of the recent increase in unemployment has been by uninsured workers, which could signal they are either new entrants to the workforce or undocumented.

The share of unemployment accounted for by new entrants into the job market has been rising, a sign of a still attractive labour market (Chart 4).

The numbers of unvoluntary part-time workers ‘part time for economic reasons’ have been rising but remains close to the 2019 average (Chart 5).

Minorities unemployment signals a strong labour market (Chart 6). The spread between African-American and white unemployment rates is stable and below 2019. The spread between Hispanic and white unemployment is stable but higher than 2019, which could reflect strong immigration flows, which are largely from Latin America, and that migrants take longer than native workers to find jobs.

JOLTs data also point at a strong labour market (Chart 7). Hirings, layoffs, and quits are below the 2019 average. However, the difference between hires and separations (= layoffs + quits, i.e., the rate at which firms replace the outflow of workers) is the same as in 2019 – and positive.

Unemployment duration is comparable with 2019 but the difference between mean and median is smaller this time, which suggests fewer long-term unemployed than in 2019, another sign of a healthy labour market (Chart 8).

Average participation and employment to population (EPOP) ratios are stable while the prime age ratios remain close to post pandemic highs (Charts 9 and 10).

What then explains the dip in NFP?

Tighter Border Policy Could Be Driving Down NFP

Until August and since 2022, the US had been through an unusual combination of NFP well above pre-pandemic levels and rising unemployment (Chart 11). This likely reflected a surge  in immigration that led the Congressional Budget Office (CBO) in January to raise its estimates of 2023-24 immigration to 3.3mn a year from 0.7mn a year in its 2022 demographic outlook. Immigration raised labour supply and NFP but may have also raised the unemployment rate.

Before the pandemic, the unemployment rate of foreign-born workers was about half a ppt below that of native-born workers. During the pandemic-linked recession, it rose above that of native-born workers, as it did during the GFC (Chart 12). In 2021, as the labour market recovered, foreign unemployment fell through that of native born, resuming the pattern prevailing before the pandemic.

However, since 2022 migrant unemployment has been rising faster than that of native born, possibly because the new migrants, largely undocumented and with limited linguistic and other skills have been taking longer to find jobs. That overall unemployment duration has not increased compared with before the pandemic is yet another sign of a healthy labour market.

However, in June 2024 the Biden administration announced a series of measures to tighten border controls. As a result, border encounters and associated immigration flows have fallen sharply, which could explain August combination of low NFP and falling unemployment (Chart 13). If this is the explanation, low NFP and falling unemployment could become a lasting pattern as the administration is unlikely to relax border policies anytime soon.

Interestingly, wage growth perked up in August, which could also reflect the decline in labour supply. The surge in immigrants likely played a role in the unusually weak growth in real wages during the recovery (Chart 14).  It also likely explains why the gap between low and high wage growth, that had surged during the pandemic, fell from 2022 onwards and is now below pre-pandemic (Chart 14).  Going forward, there is a risk that reduced immigration could see faster wage growth.

In his Jackson Hole speech, Fed Chair Jerome Powell stressed the importance of immigration in raising labour supply and stabilizing inflation. Because the latest Census Bureau population estimates do not reflect the recent surge in Immigration, Fed staff have built their own estimate of the labour force based on the latest CBO immigration estimates.

That said estimating the specific impact of the surge in immigration on employment, wages, and growth is difficult since no comprehensive data is available. We may be about to find out what the impact of reduced immigration actually is. If so, we will also get a sense of the likely macro impact of the mass deportations planned by presidential candidate Donald Trump if he is elected.

Market Implications

The data overall seems more consistent with a 25bp than a 50bp cut at this month’s FOMC. As Governor Waller said in Friday’s speech, ‘While the labor market has clearly cooled, based on the evidence I see, I do not believe the economy is in a recession or necessarily headed for one soon. The labor market is continuing to soften but not deteriorate, and this judgement is important to our upcoming decision on monetary policy.’

Fed tightening therefore is more to prevent a weakening of the labour market than to respond to an already weak labour market. In Waller’s words, ‘maintaining the economy’s forward momentum means that, as Chair Powell said recently, the time has come to begin reducing the target range for the federal funds rate.’

Waller also stressed the importance of policy nimbleness. The uncertainty surrounding the impact of reduced immigration is a powerful argument to start with a 25bp cut and maintaining policy flexibility.

I continue to expect a 25bp cut this month. In addition, with a strong labour market, the Fed is unlikely to cut 4.5 times as currently priced by markets. I will develop these themes in my forthcoming Fed preview.

Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)