July 4, 2025
At first blush the June employment report appeared stronger than expected. Payroll employment rose 147 thousand which was considerably larger than the 100 thousand gain that was expected. The unemployment rate declined 0.1% to 4.1% rather than rising 0.1% to 4.3%. But the details of the report provide a less upbeat view of the economy. The jobs gain in June was less robust and the unemployment higher than was reported. Data distortions continue to muddy the outlook. On balance, we continue to expect a significant rebound in GDP growth for the second quarter to 3.5% and growth of about 2.5% in each of the final two quarters of the year. That would imply growth for the year of 1.9% which would be slightly less than the 2.5% GDP growth recorded in 2024. Given the uncertainty created by constantly changing tariffs, deportation of illegal immigrants, the passage of Trump’s budget bill, wars in eastern Europe and in the Mideast, GDP growth of 1.9% for the year would be impressive. The economy continues to shrug off these potential challenges. Combining GDP growth of 1.9% for the year with the core personal consumption expenditures measure of inflation likely to increase 2.8% in 2025, it is hard to see how the Fed is in a position to ease any time soon. The markets continue to anticipate two cuts in the funds rate between now and yearend. Don’t bet on it.
Payroll employment rose 147 thousand in June. That was an upside surprise because economists had expected an increase of about 100 thousand. But the odd thing about the report was that government employment rose 73 thousand in June which means that private sector employment rose by only 74 thousand — somewhat less than expected. That is still a respectable increase in hiring, but it changes the tone of the report from a robust gain to one more in line with what had been anticipated.
Then there was the unemployment rate which surprisingly declined 0.1% in June to 4.1%. Nobody expected that. Most economists expected a 0.1% increase. But the June drop was not the result of a surge in hiring. Rather, it came about because fewer people were looking for jobs. Specifically, the labor force declined 130 thousand while civilian employment climbed by 93 thousand. As a result, the number of unemployed workers declined 222 thousand and the unemployment rate fell 0.1% to 4.1%. Some of this decline in the labor force undoubtedly reflects Trump’s enforced deportation of illegal immigrants. In the past three months the foreign-born labor force has declined while the native-born labor force has increased. That sounds like a problem, but is it?
If firms are unable to find enough workers to hire because there are fewer immigrants looking for jobs, that would be a problem. It would curtail GDP growth. But that does not appear to be the case. Both payroll employment and private sector employment continue to grow at a respectable pace.
In addition, there are currently 1.1 million job openings for every unemployed worker. That is almost exactly the ratio that existed prior to the 2020 recession. As nearly as we can tell, the labor market remains fairly steady despite the loss of some immigrant workers.
Given the imposition of tariffs most economists expect the economy to slow considerably in the second half of the year and the unemployment rate to rise. At the midway point of 2025 there is little evidence that is happening or is about to happen. Having said that, the data have been so distorted in the past six months as consumers and business people adjust to the imposition of tariffs. A big increase in imports to beat the imposition of tariffs caused GDP to decline 0.5% in the first quarter. An equally big drop in imports in the second quarter should boost GDP growth to perhaps 3.5% in that quarter. Both growth rates are distorted and the true pace of economic activity is somewhere in the middle – 1.5% perhaps? We will get our first read on second quarter GDP growth on Wednesday morning, July 30, which should help determine the extent of slowing in the economy caused largely by the imposition of tariffs which should, in turn, help us refine our forecasts for GDP growth in the second half of the year.
Stephen Slifer
NumberNomics
Charleston, S.C.
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