The critical question for the market: What is the cause of the collapse of employment in the United States?

The cooling of the US job market, is it due to a lack of workers or a lack of jobs? Wall Street is in uproar. The previously released July non-farm payroll report showed that not only did the number of new jobs fall well below expectations, but the numbers for May and June were also significantly revised downward, resulting in an average of only 35,000 new jobs over the three months, the slowest pace since 2020. The unemployment rate also rose to 4.2%, reaching its highest point since 2021. This result took former President Trump by surprise, and he directly fired the Bureau of Labor Statistics director, accusing him of "fabricating" the data, although there was no evidence. The US job market has recently cooled significantly, and the debate is whether it is due to "a shortage of labor supply" or "a decrease in labor demand"? Some people believe it is due to a shortage of labor supply, such as tightening immigration policies resulting in a smaller labor pool. Others believe it is due to an economic slowdown, with companies not needing as many workers. The reasons for the slowdown in US employment are fiercely debated on Wall Street because it directly affects whether the Federal Reserve will cut interest rates. One of the core missions of the Federal Reserve is to stabilize the economy. If it is caused by "not being able to find workers," then a softening in hiring does not necessarily mean there will be mass layoffs, so the Federal Reserve does not need to cut interest rates. But if it is due to a "decrease in labor demand," then the Federal Reserve will need to lower interest rates to stimulate the economy. The "Rashomon" in the data: Both sides are speaking with data, but neither can convince the other Wall Street is divided into two camps. Supply shortage advocates such as Morgan Stanley, Barclays, and Bank of America believe that the slowdown in hiring is more due to a decrease in labor supply, particularly the impact of immigration tightening policies, so they expect the Federal Reserve to start cutting interest rates at least by December. Demand softeners such as Goldman Sachs, Citigroup, and UBS interpret the cooling of employment more as a sign of weak labor demand, which could prompt the Federal Reserve to start cutting interest rates in September. The employment report contains a large amount of statistical data, but none directly proves which side is right, so both sides can find reasons to support their own arguments. 1. Supply shortage advocates In the past three months, the labor force participation rate has dropped by 0.4 percentage points, the largest decline in 8 years. Supply shortage advocates see the decline in labor force participation as evidence of a decrease in labor supply. Michael Gapen, chief economist at Morgan Stanley, pointed out that considering immigration restrictions, slow employment growth is not inconsistent with low unemployment rates. However, if hiring continues to rapidly cool down, they may adjust their views. One of the detailed data in the employment report is the breakdown of "foreign-born and native-born workers." The data shows that approximately 1 million foreign workers decreased in the past three months. The White House sees this as a propaganda point for immigration policy achievements. Stephen Miran, Chairman of the White House Council of Economic Advisers, said on August 1 that since the president took office, we have created about 2.5 million jobs for native-born people while reducing about 1 million jobs for foreign-born workers. This is the strong result of our immigration policy and border policy, making America safer. Federal Reserve Chairman Powell also mentioned two days before the nonfarm payroll report announcement that as long as the unemployment rate does not significantly rise, the Federal Reserve will ignore the cooling of hiring in the coming months. In the case of reduced immigration, maintaining zero new jobs per month in the US and possibly stabilizing the unemployment rate may be sufficient. 2. Demand softeners Citi economist Veronica Clark emphasized that although the decrease in immigration has an impact, the details show that demand softening unrelated to immigration is worsening. Whether it is a slowdown in immigration or demand softening, both situations will lead to a decrease in labor supply this year because labor force participation rates usually decline during an economic downturn. However, if demand softening is the main reason, it is not enough to prevent the unemployment rate from rising. Several analysts, including Bloomberg Economic Research team, pointed out that there may be statistical bias in the detailed data on "foreign-born and native-born" labor in the report because the report also shows a sudden large increase in native-born labor and population, which is very unreasonable in reality. UBS Chief Economist Jonathan Pingle also pointed out, "It's not like we suddenly have a large number of 16-year-olds born, leading to a sharp increase in the native population." Analysts believe that as the "population structure breakdown" data based on household surveys in the report becomes increasingly unreliable, they are paying more attention to another set of data hiring conditions from business surveys, which were also significantly revised downward in May and June. The best way is to list the industries that rely most on immigrant labor and estimate whether their performance is significantly worse. However, different analysts conducting the same analysis have come to different conclusions. Bank of America found that the construction, manufacturing, leisure, and hospitality industries have weak hiring, and these industries often hire undocumented immigrants and workers who have lost legal status. But Goldman Sachs pointed out that the performance of these industries is not worse than the industries severely affected by tariffs. Source: Wall Street View, Author: Fang Jiayao, GMTEight Editor: Li Cheng