Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Job Seekers Are Giving Up Despite a Strong Economy
Transcript
- Lucas: Friday's jobs report had a headline number that caught a lot of attention — just 57,000 net new payrolls in June. That's well below the trend we've seen over the past year. But if you look under the hood, the more striking number might be the drop in the labor force participation rate. Luna: Yeah, I saw that. The participation rate fell to its lowest level outside of the covid era lockdowns. CNBC had a headline that said 'Job seekers giving up.' That feels like a big deal. Lucas: It is. The unemployment rate actually ticked down to 4.2 percent, which sounds good — fewer people out of work. But that decline happened partly because people left the labor force entirely. The labor force participation rate is now at 62.3 percent, which is the lowest since the early 1970s if you exclude the pandemic plunge. Luna: So the unemployment rate is falling for the wrong reason. That seems like something the Fed would care about. Lucas: Exactly. The Fed's mandate includes maximum employment, not just a low unemployment rate. If people are dropping out because they're discouraged, that's a sign the labor market isn't as tight as the headline suggests. But then you look at the JOLTS data from May — job openings actually rose slightly to 7.59 million. That's still well above pre-pandemic levels. Luna: So there are jobs available, but people aren't going after them — or they can't. What's driving the drop in participation? Lucas: A few things. The biggest factor is demographics — aging boomers retiring. That's been pulling the participation rate down for years. But the recent drop seems sharper than what demographics alone would explain. The data shows it's concentrated among prime-age workers without a college degree. And there's also a geographic component: participation fell the most in states with lower average wages. Luna: That suggests a mismatch between the jobs that are available and the skills or location of the workers who need them. We've talked about this disconnect before. Lucas: Right. And it's not a new story — it's been building since the pandemic. But the June data brings it into sharper focus. Because if you just look at the unemployment rate, you'd think the labor market is fine. But the participation rate tells you there's still a lot of people on the sidelines. That's relevant for wage growth and inflation. Luna: How so? If fewer people are looking, wouldn't that put upward pressure on wages because employers have to compete harder for a smaller pool? Lucas: That's the classic argument. But the wage data we have — average hourly earnings rose 3.7 percent year-over-year in June — that's actually a bit below the peak we saw in 2022. So wage growth is moderating even with a tight labor market. That might be because the jobs being added are in lower-wage sectors, pulling the average down. Luna: Or because the people who are still in the workforce are not the ones who would command high wages. It's a mix shift. Lucas: Exactly. So the Fed is looking at all this and thinking: the labor market is not overheating. That argues against raising rates. But inflation is still sticky — core PCE is at 3.4 percent, well above the 2 percent target. So they can't cut either. They're stuck at 3.63 percent, which is exactly where the effective fed funds rate has been since June. Luna: It's a stalemate. And this participation drop only complicates the picture. If people start coming back into the labor force, the unemployment rate could rise even if job creation picks up — that would look soft but might actually be a positive supply-side development. Lucas: Right. And there's one more wrinkle in the June jobs report that not everyone caught: Goldman Sachs estimated that the World Cup could have boosted payrolls by about 40,000 in June. That's a lot relative to the 57,000 headline number. Luna: So without the World Cup, we might have seen job growth of only about 17,000. That's basically flat. Lucas: Exactly. Now, that estimate is from Goldman's economists and it's imprecise — but it suggests the underlying trend in hiring is even softer than the already-soft headline. When you combine that with the participation drop, you start to wonder: is the economy actually generating enough demand for workers, or are employers just not hiring as aggressively? Luna: And that gets back to the question of whether the economy is really as strong as the GDP numbers suggest. Real GDP growth was 2.1 percent annualized in the first quarter, which is solid. But if hiring is stalling, that growth might not be sustainable. Lucas: It's a puzzle. And it's the kind of puzzle that makes the Fed hesitant to move. They'd love to cut rates if they could, but they need to see more progress on inflation. And the participation data suggests there's slack in the labor market that could eventually ease wage pressures — but it hasn't shown up in the inflation data yet. Luna: If walking through the economy with us has made something click, I should mention that this show is listener-funded — no ads, no sponsors. A small group of our audience already chips in monthly through buy me a coffee dot com slash fexingo. Lucas: And that genuinely makes a difference. It's what lets us do deep dives like this every day without worrying about commercial breaks. So if you find value in the conversations we have here, that's the thing that keeps it going. Luna: Alright — back to the data. One thing we haven't touched on is the bond market reaction. The ten-year yield is sitting at 4.48 percent, which is actually down from where it was a month ago. That suggests bond traders are not convinced the economy is running hot. Lucas: That's a good point. The ten-year yield has fallen despite sticky inflation and a solid GDP print. The market seems to be pricing in a slowing economy — or at least a 'soft patch' in the second half of the year. And if the labor market continues to soften, that could drive yields even lower. Luna: Which would be a tailwind for equities, but maybe a warning signal about growth. We're seeing the S&P 500 near 7500, up 1.8 percent in the last five days. So investors are still bullish, but the bond market is telling a more cautious story. Lucas: That divergence is something we'll be watching closely. For now, the key takeaway from the jobs report is that the labor market is cooling, but not collapsing. And the participation drop adds a layer of complexity for the Fed. They have to decide whether to look through it as a structural trend or react to it as a cyclical weakness. Luna: And with the next FOMC meeting in late July, they've got a lot to digest. My bet is they hold steady, but the statement language might shift to acknowledge the softer labor market. Lucas: I think that's right. They'll want to keep their options open. And for us, the participation rate will be the metric to watch in the months ahead — if it stabilizes or rebounds, that could change the whole narrative. Luna: Great point. Let's see what the July data brings.