Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / Why Unemployment Fell While Payrolls Shrank
Transcript
- Lucas: So Luna, I keep coming back to the July jobs report. It dropped two weeks ago, but there's an anomaly in it that I don't think we've fully unpacked. Luna: Which one? Because there were a few things that didn't seem to add up. Lucas: The big one: the unemployment rate fell to 4.1 percent, down from 4.2. But nonfarm payrolls actually shrank — by about twenty-three thousand jobs. That's a rare combination, and it's worth sitting with. Luna: Wait, so fewer people are working, but the unemployment rate goes down? That sounds contradictory. Lucas: It does, and it's exactly why the two numbers come from different surveys. The unemployment rate comes from the household survey, where people self-report their status. Payrolls come from the establishment survey, which counts actual jobs on company books. They can diverge, and they did in July. Luna: So which one should we trust? Lucas: For the Fed, the unemployment rate is arguably the more important signal right now. It tells you about slack in the labor market, and it's the variable they've anchored to since they stopped targeting payrolls. Plus, the household survey also captures self-employed and gig workers, which the establishment survey misses. Luna: Got it. And the payroll decline — is that a blip or a trend? Lucas: It's a single month, so I'd be careful about overreading it. But it's not happening in a vacuum. Job openings also fell to about seven point three six million, down from seven point five. And initial jobless claims ticked up to two hundred and nine thousand, from two hundred even the week before. So there are signs the labor market is cooling. Luna: Cooling, but the unemployment rate is falling. That's the weird part. Lucas: Exactly. One explanation is that labor force participation dropped — people left the workforce, so they're no longer counted as unemployed. That's not necessarily a positive sign. It could mean discouraged workers are giving up. Luna: That's a darker read. But is there a more benign explanation? Lucas: Sure. The household survey is noisier month to month. It has a smaller sample and wider confidence intervals. So the drop from 4.2 to 4.1 could just be statistical noise. The payroll number, while also volatile, tends to be more stable. So the honest answer is: we don't know yet. Luna: And the Fed has to react to this mixed bag. What are they thinking? Lucas: They're on hold, and the fed funds rate is sitting at three point six three percent. They've been watching inflation cool — core PCE is up just slightly, and the ten-year breakeven is at two point two four, down a touch. So the inflation side is cooperating. But they don't want to cut too early and risk a reacceleration. Luna: So the jobs report gives them cover to stay patient? Lucas: It does. The unemployment rate is still low by historical standards, and even with the payroll dip, wages are holding up — average hourly earnings are at thirty-seven sixty, up a bit. So the labor market isn't collapsing. It's just not as hot as it was. Luna: But if the labor market is cooling, doesn't that eventually feed into lower inflation? And then the Fed might have to cut? Lucas: It's the classic lag. The Fed is data-dependent, and they've said they need more confidence that inflation is sustainably moving toward two percent. The next few months of data will be crucial. If jobless claims keep creeping up and openings keep falling, they might start to worry more about the employment side of their mandate. Luna: And that's the dual mandate — price stability and maximum employment. They have to balance both. Lucas: Right. And right now, the balance is delicate. On one hand, inflation is cooling — core PCE is at two point eight, I think, down from earlier this year. On the other, the labor market is sending mixed signals. The Fed chair has been pretty clear they don't want to overreact to one month, but they also don't want to be behind the curve. Luna: So what should a regular person take away from this? Like, is this good or bad for the economy? Lucas: I'd say it's neutral to cautiously optimistic. The economy is still growing — real GDP growth slowed to one point five percent annualized in the second quarter, down from two point one. So there's a slowdown, but not a recession. The labor market is cooling, but not collapsing. It's the soft landing narrative playing out, with a few bumps. Luna: But if payrolls are shrinking, isn't that a red flag? Historically, negative payrolls often precede recessions. Lucas: Sometimes, but not always. A one-month dip doesn't make a trend. And the household survey shows more people are employed than a year ago. So the labor market is still adding jobs overall, just at a slower pace. I'd need to see a few consecutive months of declines to get worried. Luna: That makes sense. So what are you watching for in the next jobs report? Lucas: I'm watching two things: whether the unemployment rate stays below four point two, and whether jobless claims stay below two hundred and fifty thousand. If either breaks past those levels, the Fed might have to shift its stance faster than expected. Luna: And meanwhile, the Fed is stuck in this holding pattern. Must be a tough job. Lucas: It is. And it's a job we get to watch closely every month. You know, it's funny — we talk about this stuff every day, and it's easy to forget that not everyone has a team of economists explaining it. That's part of why we do this show ad-free. We want to make this accessible to anyone who's curious, without any corporate sponsors pulling the strings. Luna: Yeah, and that's something I'm really proud of. It means we can say what we actually think, and not have to dress it up for an advertiser. Lucas: Exactly. And if you value that, you can support us in a simple way — buy me a coffee dot com slash fexingo. It's just a way to keep the show independent. No perks, no promises, just knowing you're helping us stay ad-free. Luna: And every little bit helps. But honestly, even just telling a friend about the show makes a difference. Lucas: Absolutely. Okay, back to the data. There's another number in the July report I think we should talk about — the drop in average weekly hours worked. Luna: Oh, that's a good one. It fell slightly, which is often a leading indicator for future layoffs. Employers cut hours before they cut jobs. Lucas: Right. And combined with the payroll dip and lower openings, it suggests businesses are becoming more cautious. They're not hiring as aggressively, they're trimming hours, and they're relying on attrition rather than layoffs. It's a slow bleed, not a sudden cut. Luna: So if that continues, we could see the unemployment rate start to rise more noticeably. Lucas: Exactly. And that's why the Fed is watching the labor market so closely. They don't want to be the ones who cause that rise by keeping policy too tight for too long. But they also don't want to cut rates and then have inflation flare up again. Luna: It's a tightrope walk. And the next few months will be decisive. Lucas: They will. And the good news is, the data is coming in fast enough that we'll have a clearer picture by the September meeting. Until then, we're in the waiting game. Luna: Well, I'm glad we have shows like this to break it all down. What's your gut feeling — are we headed for a soft landing or not? Lucas: I'm cautiously optimistic. The economy has shown resilience, and inflation is cooling without a big spike in unemployment. But the labor market is the weak spot. If that cracks, all bets are off. For now, I'm watching the claims data every Thursday. Luna: Same. And we'll be here to talk about it. That's a wrap for today.