US Jobs: A Tent Held Up by Fewer Poles
Yesterday's payroll data effectively rules out a Federal Reserve rate cut in July. The figures highlight a nuanced picture behind the headline employment figures. The Bureau of Labor Statistics (BLS) reported a rise of 147,000 non-farm payrolls in June, beating forecasts and pushing unemployment down to 4.1%. Yet, disparities exist, and earlier in the week ADP showed a loss of 33,000 private-sector jobs, suggesting underlying weakness. Moreover, the labour force participation rate fell to 62.3%, the lowest since late 2022, indicating unemployment declined largely due to workforce exits rather than robust hiring. Total employment remains 603,000 below April levels.
Job gains in June were concentrated primarily in government roles, notably state education (+73,000) and healthcare (+39,000). This narrow distribution raises concerns about broader economic resilience, prompting one economist to liken the labour market to "a tent increasingly held up by fewer poles."
The data complicates matters for the Fed. At the core of the Fed’s policy challenge lies a demographic shift resembling Japan’s recent experience. Since Japan’s working-age population peaked in the 1990s, the country has experienced persistent labour shortages, maintaining unemployment near 3%. Despite this tight labour market, Japan continues to face sluggish economic growth and persistent deflation, necessitating decades of ultra-accommodative policies by the Bank of Japan.
The US now faces similar demographic pressures, driven by accelerated retirements among baby boomers, intensified by pandemic-era workforce exits. Participation rates among older Americans remain notably below pre-pandemic levels. Declining birth rates and sharply reduced immigration further restrict the entry of younger workers. According to the Conference Board, the US must add roughly 4.6 million workers annually, four times the recent average, to match current labour demand. If the labour supply continues to shrink this will push unemployment rates lower due to fewer active jobseekers rather than vibrant job creation.
This demographic reality presents a significant dilemma for the Federal Reserve. Traditionally, declining unemployment indicates labour market tightening, potentially fuelling wage inflation and necessitating rate hikes. Current labour shortages have indeed triggered notable wage pressures. However, the Fed must discern whether this tightness genuinely signals an overheating economy or reflects demographic constraints. Fed Chair Jerome Powell recently noted pandemic-related retirements have removed over two million workers—a structural issue monetary policy alone cannot address.
Given these demographic constraints, the Fed is likely to maintain higher interest rates for an extended period to manage inflation. This "higher for longer" scenario, which will likely further frustrate Donald Trump, implies a weaker growth outlook compared to an environment where the Fed focussed purely on boosting employment. Whilst the knee-jerk reaction was for US Treasuries to sell-off, the prospect of falling inflation and weaker growth is a longer-term positive for bond investors.
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