News & Insights

Headline Payroll Numbers Show Weakness But May Be Overstated

The recent jobs reports and steep revisions have raised concern about the health of the job market. Initial Bureau of Labor Statistics estimates show growth of only 22,000 jobs in August and an average of only 27,000 for the past four months. While the numbers are concerning, they may not be as significant a warning as they appear on the surface.

Any analysis of the employment picture must include the effect of the ongoing deportation operations. The household survey, which differentiates between foreign-born and native-born workers, provides a fuller picture of employment. The household survey is more volatile and relies on a smaller sample size than the payroll survey, making conclusions from the month-to-month changes unreliable, but it gives a more fulsome view of employment. Foreign-born employment has fallen by 1.4 million people in the last five months, rivaling only the declines during the pandemic and the 2008 financial crisis. Meanwhile, native-born employment has grown by a healthy 1.3 million in the last five months. Reported weakness in the household survey is not indicative of large layoffs by U.S. businesses.

Evidence of slowing in the unemployment claims data is mixed. Weakness can be seen in continuing unemployment claims, which remain elevated. That indicates that it’s taking longer for some unemployed workers to find new jobs. Average weeks unemployed substantiate this, hitting their highest level in more than two years. Initial unemployment claims, however, remain subdued outside of the most recent week indicating deterioration, which we discount pending a trend. Similarly, earnings calls for large companies suggest that while outright firings are low, many companies are choosing to reduce employment through attrition. Taken together, it shows the job market is slowing but not recessionary. 

The Job Openings and Labor Turnover Survey data also indicate a tepid job market. Openings, hirings and layoffs are all low but remain rangebound for the last year, highlighting the “low hire, low fire” narrative.

Five years into a business cycle and following a period of excess stimulus during and after the pandemic, the economy is near full employment. With the Baby Boomer generation in the middle of retirement and the generation looking for their first job being a smaller cohort, the total labor supply has remained stagnant throughout this year. Young workers are further challenged as artificial intelligence is beginning to replace many prospective entry-level jobs. 

While the evidence is somewhat mixed on the health of the job market, it probably isn’t stalling and is more likely just downshifting. Deportations, a later-cycle economy and a shrinking supply of native-born workers are likely to push up wages and subdue the level of jobs the economy can create.

Non-Farm Payroll Employment (Monthly Change) 

Source: Bloomberg

Foreign-Born vs Native-Born Employment (Year-Over-Year % Change)

Source: Bloomberg

Total Size of Labor Supply has Stagnated Year-to-Date

Source: Bloomberg

Dueling Over Inflation

Dueling forces have caused inflation to remain elevated, complicating the Federal Reserve’s mandate to maintain stable prices and achieve its inflation target of 2%. The headline Consumer Price Index ticked up for the fourth consecutive month, rising to 2.9%. Core CPI, which excludes volatile energy and food prices, is significantly higher at 3.1%. There is some evidence that tariffs have fed into inflation, particularly in the goods sector.

A majority of tariff-related price increases have been at the production end of the supply chain. The prices producers pay and are charging their business customers have risen significantly, especially for goods such as durables, apparel and toys. Prices for consumer goods have risen more modestly but it has reversed a trend in falling prices in the sector.

However, goods make up less than half of the CPI and even less in the Fed’s preferred measure, Personal Consumption Expenditures. Even smaller still, only a third of that basket is imported, and is mostly core goods. Overall housing cost inflation, a significant component of inflation indices, has slowed considerably. Apartment rents, which carry a heavy weighting within housing costs, have fallen year-over-year, according to industry data sources. With tensions moderating in the Middle East, significant spare OPEC oil production capacity and an energy-friendly U.S. administration, energy price inflation also seems likely to remain constrained.

While it would seem that the domestic services should be immune to tariffs, many industries are heavily reliant on goods for their service output, and the government doesn’t distinguish between goods that are sold as part of a service and the labor associated with it. For example, if an automobile repair shop charges someone 10% more because a part is more expensive, the final bill to the customer rolls the parts and labor together. The government looks at this as an increase in the service, even if the labor portion didn’t go up. Services inflation, excluding rent, remains elevated, now sitting at 4% year-over-year.

A survey from the Federal Reserve Bank of New York showed that service providers were passing along more of the tariff costs than manufacturers, but the rise of services inflation is not wholly attributable to tariffs. Elevated employment cost growth of 4.2% on an annualized basis is also contributing as wages are the largest cost to providing services. With the supply of labor largely unchanged this year, labor scarcity will and may already be giving employees leverage to demand higher pay. Japan is currently experiencing this very issue. A combination of Baby Boomer retirements and a smaller cohort of new workers entering the workforce will only weaken the supply of labor over time. Deportations and a still relatively low unemployment rate are also weighing on the pool of available workers.

Acceleration of economic growth above the 1.5% malaise we are experiencing could be challenged by the lack of expansion of the labor pool. The capital spending incentives incorporated in the One Big Beautiful Bill Act and potential rate cuts should result in higher growth in the economy in 2026, but will require either a boost in productivity, an expansion of workforce participation, or would result in higher unit labor cost.

So, while tariffs are likely to exert some upward pressure on goods inflation, other factors including subdued energy and rent, may temper the increase going forward. Wage and service inflation will likely be the make-it or break-it component on inflation for the Fed.

CPI Components: Rent, Services, and Core Goods (% Growth Year-Over-Year)

Source: Bloomberg

S&P Global PMI Output Prices (Both Manufacturing and Services)

Source: Bloomberg

Year-Over-Year Rent Growth: United States

Source: Apartment List Rent Estimates

Key Market Indices Performance

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