Kiplinger Jobs Outlook: Beneath the Surface, Signs of More Slowing

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A better-than-expected increase of 147,000 jobs was reported for June, but half of these jobs were in state and local government. Private-sector jobs grew by a more modest 74,000. Other signs of slowing in the labor market:

• Little growth in the private sector outside health care and social assistance employers, which added 58,600 new positions.
• The surge in the state and local government sector will not be sustained, as almost all of it was the result of odd seasonal effects in public education hiring.
• The unemployment rate declined to 4.1%, but that was partly attributable to a drop in the labor force as fewer people looked for work.
• Hours worked dropped in June for the first time in five months. Normally, this shows an upward trend over time.
• Wage growth slowed modestly over the past four months to a 3.7% annual pace. Wage growth tends to lag other labor market indicators, so this is confirmation that the hiring slowdown is actually happening.

Consumer and business uncertainty about the economy will continue to delay hiring plans and to slow pay gains. Hiring is often deferred when consumers are concerned about losing their jobs, or when businesses don’t know whether there will be a positive return to investing in additional workers. Prior to the new administration’s tariffs, we expected monthly job growth of about 150,000 new positions to continue. Now, that could fall below 100,000 if enough employers decide to hold off on hiring while they sort out the effects of the tariffs on both their businesses and the economy as a whole. The uncertainty is also likely to ease annual wage growth to 3.5% by December.

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The recent labor force declines were likely caused by the campaign to deport immigrants. The number of foreign-born workers in the labor force has dropped in each of the past three months. (The Bureau of Labor Statistics survey does not distinguish between legal and illegal immigrants.)

The signs of slowdown in the June jobs report make it more likely that the Federal Reserve will cut interest rates this fall. Our view is that the first cut will come in October, since the Fed is also waiting to see what impact the tariffs will have on inflation. The Fed would also like to see wage growth start to come down a little faster, since bigger pay gains make it harder to hit its goal of 2% inflation.

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