Trump Shot The Messenger
After weak labor market data in July, President Trump fired the statistics chief of the Bureau of Labor Statistics (BLS) for allegedly manipulating the figures for "political purposes." Afterwards, the president went on to have a press conference to make a case against the weak job figures. Markets' response to this chain of events was bullish, as rate cut expectations surged to 5 cuts by the end of 2026. According to CME Group's data, 88.6% of market participants expected a 25 to 50 basis point rate cut from the Federal Reserve in September.
Look From Both Sides
To get a stronger grasp on what is actually going on with the data we need to dive into the story more than the headlines provide. The job growth data itself does not represent unemployment — we must also look into labor supply. Job growth can slow down without having an uptrend effect on unemployment.
In order to calculate the change in unemployment, BLS sums the monthly change in labor supply and job growth. In July BLS recorded a decline in labor supply, initially causing the break-even job growth numbers to decrease. But why did the labor force decrease? Diminishing labor force can be used as a superficial argument, but solely using this argument leads to wrong answers — job market had worse labor force diminishes throughout the years but unemployment was barely affected.
Why the Unemployment Rate Lies
As financial market actors raise questions about recession or stagflation, tracking the unemployment rate has become more important than ever. The unemployment rate is often treated as the ultimate scoreboard for the labor market, but it leaves out a critical — and growing — part of the story.
After the pandemic, job market data seemed "a little bit different" from what households were experiencing. The unemployment was stable but it felt almost impossible to find a job. Indeed, it was pretty much impossible because even if unemployment looked the same, there were more people looking for jobs behind the scenes. A civilian contributing to labor force data is considered unemployed only if they: do not have a job, are actively looking for a job, and are currently available for work.
Many unemployed people prefer contingent or gig work over filing for unemployment benefits. As of July 2023, around 16.5 million people held an alternative job — around 10.2% of the working population. Furthermore, 4.3% held a contingent job, rising from 3.8% in 2017. This means the unemployment rate is currently not sufficient enough to accurately represent the general economy.
So What?
The U.S. labor market isn't as healthy as the unemployment rate suggests. A shrinking labor force, growth in insecure gig work, and policy headwinds like tariffs can combine, eroding consumer spending power and pushing businesses into further layoffs — causing a stagflationary shock. Investors should look beyond the headline numbers.
Robin Williams was a genius who understood how the world works better than most. During a macroeconomic class, Williams' final paper contained a single sentence: "I really don't know, sir." He failed the class. But if you ask me, his answer is the highest level of economic wisdom. — Collab Fund Blog