August 1, 2025

Payroll employment rose by 73 thousand in July which was just a bit below what had been expected. The surprise was in the revisions to employment in earlier months. Employment for May was revised down by 125 thousand. Employment in June was revised down by 133 thousand. Many economists are convinced that GDP growth is slowing rapidly and that the Fed will cut rates 0.25% in both September and December. But why is employment growth slowing? Is it because the economy is weakening and that lower rates are needed to boost aggregate demand and prevent it from slipping over the edge into recession? Or is reduced employment occurring because there are simply not enough workers available to hire? While there is undoubtedly some slippage in demand, in our opinion, the primary cause of the slower employment growth is the decline in the labor force caused largely by the reduction in the number of foreign born workers available to hire. If that is the case lower rates may stimulate the demand for goods and services, but it will not boost GDP growth or employment. Furthermore, if firms need additional workers but cannot find them they will boost wages in an effort to steal workers from other companies, but that will translate into a faster rate of inflation. While employment growth has slowed, we are not convinced that lower rates are the solution.

Given the increase in employment in July of 73 and revised gains of 19 thousand in May and 14 thousand in June, employment has risen just 35 thousand in the most recent three-month period. At the end of last year employment was climbing by 200 thousand per month. By March it slipped to 110 thousand. And in the most recent three-month period it has slowed further to 35 thousand. Such a dramatic slowdown in employment is almost invariably indicative of slower GDP growth.

And, in fact, GDP growth has slowed somewhat. Following 2.5% GDP growth last year, growth in the first half of the year growth slipped to 1.0%. The imposition of tariffs, layoffs of federal government workers, and the deportation of thousands of migrant workers has caused considerable uncertainty which almost clearly translated into slower growth. But consumers and business people have adapted to these wrenching changes fairly well and, for what it is worth, third quarter GDP growth seems likely to rebound to about 2.5%. So while growth has slipped it does not appear to have softened dramatically.

With respect to the labor market payroll employment growth has slowed but the demand for workers remains fairly solid. For example, employers can alter the length of the workweek for their existing workers. The nonfarm workweek came in at 34.3 hours in July which is about where it has been throughout the first half of the year, and it is just a hair below the 34.4 hours that existed five years ago – prior to the recession. If the economy had weakened significantly the workweek should have fallen sharply. It has not.

While payroll employment growth has slowed that has been achieved largely by firms not replacing a worker that leaves the company which reduces the headcount via attrition. Firms have not felt a need to actually lay off workers as evidenced by the fact that initial employment claims have not risen appreciably. At 220 thousand they are almost identical to where they were at the end of last year. If GDP growth had weakened considerably firms would clearly be laying off workers. They are not.

Finally, job openings have slowed from a peak of 11.7 million in early 2021 to 7.4 million today. But job openings were 7.4 million at the end of last year and, were at about 7.0 million prior to the recession in 2022. If the economy has slowed considerably job openings should be much lower. For what it is worth, there were 1.1 million jobs available for each unemployed worker going into the recession. There are still 1.1 million jobs available for each unemployed worker.

As we see it, the demand side of the labor market is holding up fairly well. Firms continue to work their existing employees for a relatively normal length of time each week. They are not opting to lay off any of their workers because might need them later, but if somebody leaves the firm their position may not be filled. Firms are reducing headcount via attrition.

We would suggest that much of the slower growth in employment is a function of reduced growth in the labor force — the supply side of the equation. At the end of last year the labor force was growing by about 100 thousand per month. But the labor force has actually declined slightly since January. A couple of things are going on.

First of all, Federal government hiring has been reduced somewhat in recent months. Federal government workers reached a peak in January at 3,015 thousand workers. They are currently 2,931 thousand – a total decline of 84 thousand or about 14 thousand per month. Reduced federal hiring may be contributing slightly to the slower growth in payroll employment. It is important to keep in mind that many of these laid off Federal government workers will be reabsorbed elsewhere in the private sector. Hence, Federal government layoffs are a minor factor in the slower growth of payroll employment.

More important is reduced immigration. The border has been essentially closed since the beginning of the year. Thus, there are fewer immigrants (both legal and illegal) crossing the border. For example, in June 25,200 people crossed into the U.S. at all border crossings. In June 2024 that number was 204,900 thousand. The border is closed.

The drop in the labor force since January has been exclusively foreign born workers. In fact, the number of those workers has fallen by 1.2 million since January which has been partially offset by an increase in the number of native born workers.

Thus, it appears to us that the recent softness in employment is less attributable to a drop off in demand, and more the result of reduction in the number of available workers.

Lower rates could stimulate the demand for goods and services, but how will firms actually increase output to satisfy that greater demand? They are already having difficulty finding enough workers to hire. They may well choose to offer higher wages in an attempt to steal some workers from other companies. But those higher wages will almost certainly get passed through to consumers in the form of higher prices which will result in a faster growth rate for inflation.

The Fed could opt to cut rates a couple of times later this year. That may help alleviate some of the pressure Fed Chair Powell is currently getting from Trump, but it may not result in faster growth in employment or faster GDP growth. In our opinion, the economy does not need lower rates to create more jobs. It needs more stable policies coming out of Washington.

Stephen Slifer
NumberNomics
Charleston, S.C.