Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Labor Force Drop That Confuses the Fed
Transcript
- Lucas: The headline on the June jobs report this morning was only fifty-seven thousand new payrolls, which is well below what economists were expecting. But the number that really caught my eye was buried deeper in the release: the labor force participation rate dropped to its lowest level outside of the pandemic in fifty years. Luna: That's huge. The unemployment rate actually ticked down to four point two percent, but if people are leaving the workforce entirely, that drop isn't really good news. Lucas: Exactly right. The unemployment rate can fall for two very different reasons: either people are finding jobs, or they've stopped looking. The latest data shows more of the latter. The participation rate decline means the pool of available workers is shrinking, and that changes how we read every other labor market metric. Luna: So the fifty-seven thousand payrolls number — is that just noisy, or is it signaling a real slowdown? Lucas: I think it's a bit of both. The three-month average for payrolls is still around one hundred twenty thousand, which is fine but not robust. And remember, Goldman estimated the World Cup boost might have added forty thousand temporary jobs in June, so the underlying private-sector trend could be even softer than the headline suggests. Luna: Right, the ADP report earlier in the week showed private payrolls up ninety-eight thousand, also below consensus. So there's a consistent picture of moderation. Lucas: Consistent moderation, yes. But the participation drop complicates the narrative. If fewer people are working or looking for work, then the labor market can feel tight even with sluggish hiring. Employers still report difficulty finding workers, but that's partly because the labor force isn't growing. Luna: And the Fed is watching this closely. They're stuck at three point six three percent on the fed funds rate, and the data keeps sending mixed signals. Lucas: Right. Core PCE inflation is still above three percent — the latest read was three point one percent year-over-year. The Fed's preferred gauge hasn't come down to target. But if the labor market is genuinely cooling, that argues against further tightening. The participation drop adds a wrinkle: it could keep wage pressures elevated because the supply of workers is constrained. Luna: Average hourly earnings were up to thirty-seven dollars and sixty cents, still growing at a pace that's a little above what's consistent with two percent inflation. Lucas: Exactly. So you have this strange environment where hiring is slowing, but wages are still sticky. The bond market seems to be pricing in a higher for longer scenario. The ten-year Treasury yield is at four point four eight percent, up sharply over the last week. The two-year is at three point six seven percent, so the yield curve is still inverted, but less deeply than earlier this year. Luna: The inversion narrowing suggests the market is expecting the Fed to cut eventually, but not urgently. That fits with the participation story — if the labor force isn't expanding, the Fed might worry less about overheating and more about structural shortages. Lucas: Yes. And this is where the macro picture gets genuinely interesting. Real GDP growth annualized is only two point one percent, so the economy isn't booming. But nominal GDP is still above thirty-one trillion, and the price level keeps creeping up. The combination of moderate growth, sticky inflation, and a shrinking labor force is unusual. Luna: It's almost like a supply-side problem, not demand-side. There's enough demand, but the economy can't produce more because there aren't enough workers. Lucas: That's exactly the framing I'd use. And it puts the Fed in a tough spot. If they cut rates too soon, they risk reigniting demand when supply can't respond, which pushes inflation higher. If they hold steady, they risk letting the labor market soften further. The participation rate is the key variable to watch. Luna: Speaking of making sense of the economy, if walking through these data points with us has made something click, I'll just mention that listener support is what keeps this show ad-free and independent. It's a small thing that makes a big difference for us. Lucas: Yeah, absolutely. If you find value in these daily conversations, you can support the show at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. No pressure, just putting it out there. Luna: And we really mean that — it helps us keep the focus on the data without any sponsor noise. Now, back to the participation rate... Lucas: So the question is: will the participation rate bounce back? Historically, once workers leave the labor force during a downturn, many don't return. But this isn't a typical downturn. The pandemic caused a wave of early retirements and career changes, and some of those people might be drawn back if wages keep rising. Luna: The JOLTS data showed job openings ticking up slightly to seven point five nine four million in May. So there are still plenty of vacancies. The mismatch is that the available workers don't have the skills or aren't in the right locations. Lucas: Right. And initial jobless claims remain low at two hundred fifteen thousand, which suggests employers aren't laying people off. They just can't find new hires. That's consistent with a labor market that's tight in a structural way, not cyclical. Luna: So where does that leave us for the second half of the year? The Fed's next meeting is later this month. Are they really going to hold at three point six three percent? Lucas: I think they hold. The data since the last meeting hasn't been decisive enough to move. Core inflation is still above target, but the labor market is softening just enough to justify patience. The participation drop probably reinforces their wait and see stance, because it suggests the economy's potential growth rate has fallen. Luna: Lower potential growth means the Fed's neutral rate might be higher than they thought. That's a whole other conversation. Lucas: It is. And it's one we'll have in a future episode. For now, the key takeaway is that the June jobs report wasn't just about missing payroll estimates. It was about the quiet decline in participation that makes the unemployment rate less reliable as a signal of labor market health. That's the story the market is still digesting. Luna: And with the ten-year at four point four eight percent, the bond market is clearly paying attention. Thanks for joining us on this episode of The Macro Memo. Lucas: We'll be back tomorrow with another take. Until then, keep an eye on those participation numbers.