Yardeni Research | Does The Jobs Report Change Anything?

💡Calendar effects significantly distorted the July US jobs report's government payroll decline because a five-week gap between the June and July survey periods, instead of the usual four, caused an unusually large number of routine summer school contract expirations to occur before the July cutoff. This led to a plunge of 57,000 in local government payrolls, the largest monthly decline since October 2021, with local government education employment specifically falling by 49,600. Most of this decline is expected to reverse as school districts resume seasonal hiring for the new academic year.

💡World Cup-related distortions played a significant role in exaggerating the perceived weakness in July's private-sector employment figures. Employers had front-loaded hiring during the spring in anticipation of the tournament. When the usual July hiring pattern did not materialize, the seasonal-adjustment process converted this shortfall into reported job losses, particularly impacting industries like Leisure & Hospitality and Retail Trade. Despite these reported losses, job openings in both Retail Trade and Leisure & Hospitality remained high, suggesting underlying demand was still strong.

💡Specific industries experiencing job losses in July due to World Cup-related distortions include Leisure & Hospitality, which lost 40,000 jobs, and Retail Trade, which saw a decline of 19,000 jobs. Financial Activities also lost 14,000 jobs during the same period. These declines were largely attributed to the post-World Cup seasonal adjustments, where front-loaded hiring for the tournament in spring led to reported job losses in July when expected seasonal hiring patterns did not occur, despite job openings remaining elevated in these sectors.

💡Most other US industries, apart from Leisure & Hospitality, Retail Trade, and Financial Activities, performed positively by adding jobs in July. For instance, construction payrolls increased by 22,000, marking the most significant gain since January, while the Information sector added 11,000 jobs, its highest since November 2022. The one-month payroll employment diffusion index reached 51.8% in July, indicating that more than half of industries expanded their payrolls, contributing to an average monthly increase of 44,000 payrolls over the past six months, which is consistent with maintaining stable unemployment.

💡Baby Boomer retirements significantly impact US labor force participation rates by exerting downward pressure on overall labor supply. The participation rate for workers aged 55 and older fell to 36.9% in July, its lowest since 2005, while participation among those aged 65 and older continues to decline. Older Americans now constitute a record 50% of everyone not in the labor force, an increase from less than 40% in 2011. As this large cohort continues to retire, labor-force growth is expected to remain constrained.

💡Slower net immigration has a negative effect on US labor supply growth, as growth in the foreign-born labor force has decelerated from over 4.0% year-over-year during 2023 and 2024 to less than 2.0% currently. Foreign-born workers typically participate in the labor force at a higher rate (approximately 66%) compared to native-born workers (around 61%). Consequently, if stricter immigration policies continue to restrict the foreign-born labor force, aggregate labor force participation will likely remain under pressure, contributing to a tightening labor market where demand has exceeded supply for three consecutive months.

💡The AI buildout is influencing wage growth in specific US industries by raising demand for specialized technical, engineering, and construction workers whose skills are scarce, leading to upward pressure on pay. For example, construction wages rose 4.4% year-over-year in July, nearing the fastest pace since October 2024, driven by data center construction. Information services also saw average hourly earnings accelerate to 5.8% year-over-year in July, its fastest since March 2023. Additionally, utilities industry wages increased sharply by 8.1% year-over-year, reflecting growing demand for labor in jobs related to expanding power and grid infrastructure supporting AI.

💡Aggregate average hourly earnings growth might be understated because the series is sensitive to shifts in workforce composition, particularly the retirement of higher-paid Baby Boomers. As these highly paid workers leave the workforce, their wages are removed from the average. If they are replaced by younger, lower-paid workers, the measured wage growth can appear slower, even if individual workers receive consistent raises. This dynamic mirrors the pandemic distortion where layoffs of lower-wage workers mechanically inflated average hourly earnings, suggesting the current trend is an inverse compositional effect.

💡The US labor market is sufficiently stable, indicating it is strong enough that rate cuts are not warranted to support employment, and not so tight that it generates inflationary pressure. Unit labor costs rose just 1.2% year-over-year in Q2. This stability means the Federal Reserve has little reason to worry about the employment side of its dual mandate, allowing it to focus primarily on price stability. The employment situation is not deteriorating and does not present an obstacle to potential tightening if inflation necessitates such a response.

💡New York Fed President John Williams considers a monthly core PCED inflation rate of roughly 0.2% during the second half of this year as consistent with disinflation. Persistent readings above this benchmark would indicate that inflation is proving more stubborn and could necessitate a monetary-policy response. The Cleveland Fed's Nowcasting model estimates that core PCED rose 0.27% month-over-month in July and is projected to rise another 0.27% in August, both exceeding Williams' benchmark, suggesting inflation may be more persistent than desired.