Summer Heat in the Job Market is Real

The June employment report indicates a payroll increase of 147,000, surpassing Wall Street’s expectations, which were set below 110,000.

There’s some skepticism here. Critics often point fingers at State and Local Government Employment. If we strip that away, plus a few factors in healthcare and social support, private sector growth shrinks to just 28,000. That’s not encouraging.

Initially, it appears that the Jobs Report shows strong figures, but further analysis reveals a different story. Strong job numbers can sometimes stem from a boost in government employment. However, that wasn’t the case last month.

Last month showcased a different scenario altogether: Private employers led the charge. It was a month where native-born Americans began rejoining the workforce, and demand remained high—almost crowded, in fact.

High Demand, but Slow Hiring

To really get a grasp of what’s happening, you need to look beyond the surface of the payroll numbers. The JOLTS Report, which tracks job openings at the end of May, highlighted strong demand in various private sectors. Notably, accommodation and food services saw a surge of 221,000 openings, while finance and insurance added another 91,000. This doesn’t fit the narrative of a weak labor market.

Yet, when the June employment stats came out, the actual job creation was minimal: just 6,500 in food service and 3,000 in finance. It’s not that employers weren’t looking to hire; they simply couldn’t find the right workers.

This doesn’t signal weakness. Instead, it’s a job market where the demand for workers outpaces the available supply, with the public sector stepping up.

When unemployment rates are high, we often view the public sector as a buffer—a sort of Keynesian support to prevent the labor market from collapsing. But that’s not the current situation.

The unemployment rate fell in June to around 4.1%, which is not typical in a struggling labor market. This situation occurs when workers are able to find jobs faster than anticipated, even outside of usual high-employment sectors.

To clarify: government employment acts as a stimulus during downturns, particularly when unemployment is decreasing, which was the case in June. Tax revenues surged, allowing agencies to hire proactively. Meanwhile, private companies had job openings but struggled with staffing. There was demand, yes, but wages and onboarding times made public sector jobs more appealing.

The Labor Market is Adapting, Not Shrinking

Some economists suggest that the tensions in the labor market stem from a mere supply issue. They’ll cite common reasons like decreased immigration, stricter deportation policies, and lower participation rates. However, the numbers reveal a different narrative.

In June, native-born American employment rose by 830,000, while foreign-born workers’ numbers dropped by 348,000 for the third straight month. The labor force participation rate among native-born individuals increased from 61.4% to 61.8%.

This isn’t a labor shortage; instead, it’s a reconfiguration of the workforce. There are fewer foreign-born workers, but more Americans are stepping in to take jobs. Employers that previously relied on a global talent pool are now focusing on the domestic workforce and adjusting their strategies. American workers appear to be rising to the occasion, feeling the responsibility to fill those roles.

This may involve higher wages and longer hiring processes. But, it does raise a long-standing question: do Americans step up for their jobs? The answer is becoming evident—indeed, they do.

Mixed Trends in Different Sectors

Of course, not all sectors are thriving. Retail has seen a drop in job opportunities and wages, while transportation and warehousing are facing similar difficulties. Professional and business services, usually reliable for white-collar job growth, are no longer adding positions.

There could be more nuances in these sectors, potentially indicating real economic softening. This poses questions for the Federal Reserve. Inflation seems to be easing, interest rates continue to rise, and some private sectors are clearly losing steam. Why hasn’t the Fed started to adjust?

For a while now, the Fed hinted that tariff-driven inflation could resurface. But, actually, price pressure seems to be easing as the labor market finds its balance. A more informed central bank could recognize this and choose to slow down.

A New Structure in the Labor Market

Once you sift through the noise, the June employment report delivers a clear message: the economy continues to add jobs, but in a different manner. The public sector is ramping up hiring faster than private companies can keep pace. Native-born workers are returning to the job market while foreign-born employment is declining. Industries eager to hire, such as healthcare, finance, and food services, find it tough to attract labor.

This isn’t just another post-Covid upswing; it’s a new structure of the labor market. Slower, tighter, and fundamentally oriented towards domestic labor. It’s an economy adapting to fresh constraints and shifting priorities.

If the Fed believes this resembles an overheated market, maybe it’s time to take a closer look. The June employment report isn’t a red flag. Instead, it represents a red, white, and blue flag.