June jobs report: Better than expectations 

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Alexa Hanelin: Welcome to 'Research Recap' on J.P. Morgan's Making Sense. I'm Alexa Hanelin, and today I'm joined by Mike Feroli, our chief U.S. economist. We're here to talk about the June U.S. Employment Report and what it means in the context of the broader path for the U.S. economy and for the Fed. Mike, thanks so much for joining us.

Mike Feroli: Thanks for having me.

Alexa Hanelin: So we received a pretty gangbusters labor report today, coming in at 147,000 jobs, upward revisions to prior months, and a falling unemployment rate. The market was not expecting such a strong data set, and this is the fourth consecutive month that the headline numbers have beat CERB expectations. Walk me through what was most notable to you in this report.

Mike Feroli: Yeah, so as you mentioned, it did beat expectations. So I think some of the headlines were a bit misleading in terms of the strength that it conveyed. Starting with the headline number of 147,000, about half of those jobs were actually in the government sector. I think what you see is that private sector activity seems to be moderating. We saw that not only in private sector job growth of 74,000, but in the average work week in the private sector, which ticked down, and the diffusion index was below 50. So as I said, momentum in private activity seems to be moderating. And then you mentioned the unemployment rate. That also ticked down to 4.1%, which was a welcome development, though that occurred alongside a decline in the labor force participation rate, which is a less welcome development. So on net, not really a big change in how we're seeing labor markets slack after this report.

Alexa Hanelin: You mentioned the softening in private payrolls. Could this be reflective of the immigration and deportation momentum?

Mike Feroli: You know, it's hard to necessarily pin it down on that. You know, it's not like we saw, if anything, construction and leisure and hospitality, which we don't have great data on, but we think that's probably overrepresented with immigrants, did fine. But again, we just don't have really precise data to kind of say whether it was immigration, whether it was trade policy uncertainty, or whether it's just overall moderation in economic activity.

Alexa Hanelin: Yep. So going into the print, the market had been pricing in a 20% probability of a July Fed cut and two and a half cuts priced in for this year. As of 10 a.m. today, the market fully unwound those July probabilities, and we're now pricing in just two cuts for 2025. This is still a bit more dovish than our house view of just one cut for the year in December. What would you need to see to pull your forecast earlier or closer to market pricing?

Mike Feroli: Yeah, so I think we could still see a cut in September, but I think it's conditional on two things. One is you're going to have basically three CPIs between now and then. I think you would need to see those not show much evidence of tariff price pass through. And then I think you probably also want to see more softening in the labor market relative to what we saw today. So I think you could get to September, you could obviously get to November, but I'm not ready to go there just yet because I think, you know, much like Chair Powell said last week, I think we have probably yet to see some of that tariff price pass through and I think they want to get past that before contemplating a cut.

Alexa Hanelin: And we'll discuss tariffs and inflationary impulse and CPI in a moment. But on the topic of the Fed, we've seen somewhat of a shift in Fed speak from Bowman and Waller, who were advocating for earlier cuts versus Powell, who's continued to perfer several more months of data before moving forward. How do you think that division will impact the Fed's pace to cutting?

Mike Feroli: So right now, it has really only been Bowman and Waller talking about a July cut. I suspect after today's report, they might be advocating that with less vigor. But really, much of the rest of the committee, whether it's, you know, Williams or others have been sounding much like Powell, which is to say, pretty content to be patient in assessing the data. So right now, I think it's really just Bowman and Waller who are the outliers. So I would expect Powell will easily be able to stick with his plan for a patient approach.

Alexa Hanelin: It looks like the market may trade closer to our call for the Fed. Let's broaden the scope a bit and talk about the health of the overall economy. You mentioned in your mid-year outlook that we may be in for sub-trend growth for the second half of the year. How do you see the current trade policy uncertainty affecting economic growth?

Mike Feroli: Yeah. I guess first, what I would say is right now, when you look at the first half of the year, you average the first and second quarters, we're probably already running sub-trend, something like 1%-ish. And we think probably more of the trade policy developments will hit us in the second half of the year when we'd expect to see things like capital spending slow, perhaps hiring slow even further. So, we got to keep in mind that some of these trade policy developments are of pretty recent origin. So I think we have yet to see those, and we're going to be assessing that as we come. But we would expect it to be more of a second half story.

Alexa Hanelin: And then in terms of the strength of the consumer, we're starting to see some softness. Sentiment's been soft for some time, and now we're finally seeing it in consumer spend. How are you thinking of that as we enter into the second half of the year?

Mike Feroli: Yeah. So consumers, the recent news on consumer spending has been, as you point out, on the softer side through the first half of the year. And we think it's going to be still a little bit challenged in the second half of the year. Some of the tariff pass-through happens in the second half of the year. Those higher headline prices will eat into consumer purchasing power, and we think that's going to affect outcomes as we go through the rest of the summer and into the fall.

Alexa Hanelin: Let's talk briefly on the One Big Beautiful Bill. A passage in the next week or two looks most likely. At first glance, what do you think the fiscal impact will be to growth? And is there anything you're looking for within the bill itself, like distributions of tax breaks or government spending cuts, that you think will have a stronger impulse on the growth picture?

Mike Feroli: So big picture is that this is probably not much of a macro story, because largely what it does is keep existing tax policy unchanged, versus the next potential for most of the tax cuts, the TCJA 2017 Trump tax cuts, were set to expire. The big part of what this bill does is extend those. There are some pretty modest tweaks relative to the old tax regime, but as I said, big picture, not much of a change in anything, really, in terms of not only the overall fiscal impetus, but even when you get down to the details. There are a few things like the tax on tips and the senior deduction, but that's probably not going to really move the needle on the macro economy over the coming year.

Alexa Hanelin: Well, that feels like a good place to close here. Thank you so much for joining and for sharing your thoughts with us, Mike, and we look forward to chatting with you again soon. And to our listeners, be sure to stay tuned to Making Sense next Tuesday, where Chris Ventresca, Global Chairman of Investment Banking and M&A, recaps the Director Advisory Services Board Summit and shares his insights on effective boardroom practices. Here's a sneak peek from that upcoming conversation.

Chris Ventresca:  One other theme that really resonated with the audience was that no individual director can be an expert. Given the size and breadth of many of the companies represented, J.P. Morgan included, it's extremely difficult for any one person to know all the answers. So having the ability to just acknowledge that and recognize it, to ask that question that you may think you should know the answer, but you don't, just breaking down those barriers so that there's a free flow of information. Each director should just be confident enough that there's enough talent around the room that if I ask a question, we can have a good, healthy dialogue to get to the right answer. I don't need to know all the answers.

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Alexa Hanelin: That full episode will be available on Tuesday, July 8th. Subscribe to Making Sense so you don't miss it. Thanks for tuning in.

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