July jobs report: A marked slowing in job creation

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Lauren Brice: Welcome to Research Recap on J.P. Morgan's Making Sense. I'm Lauren Bryce, and today I'm joined by Mike Feroli, our Chief U.S. Economist. And we are here to talk about the takeaways from the July U.S. Employment Report, as well as the path ahead for the economy and for the Fed. Mike, thanks for joining us.

Mike Feroli: Thanks for having me.

Lauren Brice: So, plenty to digest this week, the last few days punctuated by supply, a quarterly refunding announcement, a Fed meeting, and a slew of labor market data. First, talking to the latter, today's payroll number gave some fresh insights into the health of the labor market. What were your high-level takeaways?

Mike Feroli: Well, obviously, we're seeing a pretty marked slowing in job creation. Even so, the unemployment rate has been in a pretty narrow range. On net, I think the jobs report probably leaned a little on the soft side, because we had some pretty huge downward revisions of prior months. But not everything was weak, right? You had an increase in the average work week and average hourly earnings growth remains pretty robust. So, kind of a mixed picture, but you definitely are seeing a slowing in trend labor growth alongside the labor market that still looks like it's roughly in balance.

Lauren Brice: So, I suppose the catalyst in large part today for today's sizable rate rally was the large revision to the prior two months of data, bringing the three-month average down to 35,000. Can you talk us through how you're thinking about these numbers in the context of slowing immigration growth, and I guess how you're thinking about break-even labor growth figures?

Mike Feroli: So, I think it's hard to avoid the conclusion that slowing growth in the foreign-born labor force is affecting the numbers, given, as you mentioned, the last three months averaging 35,000, yet over that same period, the unemployment rate being stable at 4.2%. So, we have been thinking that the break-even or steady-state job growth number has been, you know, what two years ago might have been around 200,000 is now drifting under 100,000. And I think today's number gives further credence to that view.

Lauren Brice: We fielded a number of investor questions this morning around how the revision process actually works. Do you mind running us through just at a very high level?

Mike Feroli: Yeah, so most of the revisions that you're gonna see for the most recent two months are just gonna be from late filers, right? So, until BLS gets all the reports back from companies that they survey, they impute missing numbers. And so, it seems like the late filers, we were seeing just lower job growth than initially estimated. It was definitely an eye-catching revision. The two months together were the biggest two-month revision outside of one month in the peak of COVID. So, it's definitely a bit of a concern, particularly as, you know, funding for BLS is being reduced. So, it was unusually large, yes, for sure.

Lauren Brice: And then, I guess, looking at other sources of insight into the overall health of the labor market. Claims data this week, we got remainder low levels and have been beating expectations. ADP data, you know, also beat. And then, on the other side of the coin, we've seen quit rates and job levels both moving lower and then, of course, weak NFP today. How are you thinking about the different cross-currents in terms of the look ahead?

Mike Feroli: Yeah, so I think one message that comes across from the JOLTS report, the claims number, is that layoff activity remains low, right? So, firms aren't shedding workers, but you are seeing less just sort of vigor or gross hiring in the labor market. So, it feels like we are in a pretty steady state here, which is one of modest hiring, low layoffs, a pretty low and stable unemployment rate. So, it does feel like this is definitely a mature labor market, but one that's not as yet breaking in a more maligned way.

Lauren Brice: Let's talk about the Fed meeting we had this week. On Wednesday, we saw two dissents, the first since 1993. I guess I'm interested, has there historically been a correlation between dissents and future moves in monetary policy?

Mike Feroli: Yes, the last time we had two dissents by governors was in December of 93, and they were hawkish dissents, and then the subsequent meeting in January of 94, the Fed hiked. However, we're not as convinced that we should take the same message from this week's two dissents. I think Chair Powell actually struck a more hawkish tone than I think most were expecting coming out of that meeting. So, I think it's really gonna depend more on, obviously, how the July jobs report is being processed, and then what we see in the August jobs report released in early September.

Lauren Brice: Sure, and then I guess on that, as of 10 a.m. this morning, markets are pricing 60 basis points of cuts through 2025, or said differently, roughly two and a half cuts spread broadly equally across the next three meetings. What do you think we need to see from the August NFP print, and then I guess the next two CPIs as well, ahead of the September meeting, to see these forwards realized?

Mike Feroli: Yeah, so at the most recent FOMC meeting, Chair Powell really underscored the importance of the unemployment rate. And the unemployment rate edged up today, almost rounded up to 4.3%, so that makes it very interesting. And then I think as we look at the August report, it's really gonna be that U rate again, that I think is gonna matter. I think if it goes to 4.3, 4.4, September looks quite likely, if it moves back down to 4.1, I think we might wanna pump the brakes on a cut in September. The CPIs should matter. It's one half of the dual mandate. They may matter a little less, given how much talk there is of any tariff pass or being potentially transitory. But I think if we were to see a core CPI at a four-tenths or a five-tenths, that would make it really uncomfortable, I think, for the Fed to cut in September.

Lauren Brice: Sure, they're definitely in a tough spot. Let's turn to the growth outlook. So we're settling into an effective tariff rate, a little bit higher universally than some had originally expected. Three months ago, we were thinking 10% universal tariffs and 40% on our largest trading partner, China. Now it's looking like the universal tariffs are upward of 15%. How are you thinking about that tariff tax and that revenue actually becoming a drag on growth?

Mike Feroli: It should be a drag. I don't think we've seen much of the effect yet, in part because we haven't seen, we think we're still probably in early innings in terms of the pass-through into consumer prices, and that's when it really becomes a tax on consumers. Right now, it's probably more a tax on businesses and their profit margins. But yes, over time, this should be a tax hike of three to 400 billion per year. But as mentioned, we don't think we're seeing it yet. Maybe you might have had some hints of it in the June CPI, but we think more of it is yet to come. And as that does happen, we think that probably causes growth to slow a little bit as we go from the first half to the second half.

Lauren Brice: So you touched on business sentiment, and we're expecting a drag there to be one of the key reasons for subpar growth in the second half of this year. Are you taking much of a read from the slow of earnings that we've had from US corporates this week? Does it substantiate the view in any way?

Mike Feroli: It underscores probably what an AI-driven economy and boom this has been. You might have even seen hints of that in today's jobs report. A few weeks ago, we highlighted that there's been slower job growth in some of the professional and business services that are most exposed to AI. So, I think that's certainly one message. Beyond that, I think the correlation between S&P earnings and overall economic growth is not as tight as perhaps one might think, in part because of margins, but also because of foreign source income.

Lauren Brice: Sure, let's loop back to tariffs and in light of how they're shaping your inflation forecast. Obviously, we got quite a few developments over the course of the last week. How are you taking these deals when thinking about your broader inflation expectations as we walk through the last few months of 2025?

Mike Feroli: Yeah, well, obviously things are still pretty fluid and they might be for quite a while, but I think what we're seeing is, as you mentioned, an average effective tariff rate that's settling somewhere in the high teens. And so we do think that, again, the peak impact on consumer prices should be sometime perhaps in the next three months. So we do think July, August, September, you're probably looking at, in our estimation, core CPIs at least four-tenths, if not higher, on average. So hopefully as we get past that period, there's not second round effects, which is our expectation, but obviously it's a risk that the inflation expectations could become embedded.

Lauren Brice: So let's round out the conversation. As we walk through August, what key indicators are you watching for further shifts in the labor market and the economy?

Mike Feroli: Yeah, so for August, we have the CPI report, which will be in the middle of the month. That's gonna be pretty important. We're gonna continue to watch jobless claims, which have been pretty well-behaved. And then the next key pivot point will probably then be in early September when we get the August jobs report.

Lauren Brice: Thank you so much, Mike, for joining us and for sharing your thoughts with us. Look forward to hearing your thoughts as the data evolves next month. And to our listeners, thank you so much for tuning in to this episode of Research Recap on J.P. Morgan's Making Sense. We hope you join us again next time.

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