US Labor Market

An acute shortage of AI hardware will support tech stocks into year-end. However, AI companies may need to ultimately generate $10 trillion per year in revenue to justify their capex. Barring a massive increase in productivity growth, this will be very difficult to achieve. Despite today’s Treasury announcement of upsized buyback operations, bond yields are likely to remain elevated over the coming months. Rising crack spreads have reduced the demand for crude, which is not encouraging for global growth. On the FX front, recent intervention to support the yen will probably be insufficient, but there is significant long-term upside for the currency.

The evidence is increasingly clear that swings in labor supply, mostly related to immigration enforcement policy, have been the primary driver of nonfarm payroll growth during the past two years.This remained true in the July report which showed declines in both nonfarm employment (-23k) and the unemployment rate (from 4.19% to 4.09%). The driver of both moves was a 264k drop in the size of the labor force.When labor supply is this volatile, we should downplay measures of job growth and pay more attention to measures of labor market utilization.Measures of labor market utilization look broadly stable. The unemployment rate is trending down, but the prime-age (25-54) employment-to-population ratio has weakened, and the numbers of marginally attached and involuntary part-time workers are rising.We don’t think this morning’s jobs report reduces the odds of a September rate hike which, in our view, remain high. Next week’s July core CPI report will be a more important driver of near-term Fed policy.Please click here to access our US Labor Market Chartpack for more details on US employment trends. 

In Section I, Doug revisits the situation in the Strait of Hormuz and its implications for growth in Europe and the US. In Section II, Jonathan explores whether Kevin Warsh's appointment as Fed Chair signals a return to Greenspan-era, rules-based monetary policy.

Improving job growth keeps Fed rate cuts off the table, but evidence of labor market tightening will be required before rate hikes become part of the discussion.

 

US employment data show some tentative signs of job growth acceleration and stable utilization. We see breakeven monthly job growth as closer to +30k per month than zero.

Job creation remains stalled, but consumers are carrying on and S&P 500 earnings have been growing by double digits. Although the repercussions from the war in the Middle East are not yet clear, the US economy was doing just fine before it began.

Looking through month-to-month volatility, job growth’s underlying trend is stable and consistent with a flat-to-slightly higher unemployment rate.

In Section I, Doug recommends cutting US equity exposure in favor of Europe as reduced recession odds make it unlikely that the US will draw safe-haven capital flows. In Section II, Jesse ranks middle economic powers across hard and soft power dimensions and recommends investing in their defense and industrial sectors.

Special Report

In Section II, Jesse ranks middle economic powers across hard and soft power dimensions and recommends investing in their defense and industrial sectors.

The labor market tightened in January, significantly lowering the odds of a H1 2026 rate cut. Rate cuts driven by lower inflation are still likely in H2 2026.