Private Sector Employment Slows, But Unemployment Rate Declines
On July 4, Morgan Stanley released a report indicating that in June, the U.S. added 147,000 non-farm jobs, surpassing the market expectation of 106,000. However, private sector employment increased by only 74,000, lower than the previous three months' average of 128,000. The unemployment rate fell from 4.24% to 4.12%, not due to an increase in job opportunities, but because of a decline in the labor force participation rate.
Morgan Stanley analysts noted a "seemingly contradictory" situation in the U.S. labor market: private sector employment slows, but due to tightening immigration policies leading to reduced labor supply, the market becomes tighter.
Impact of Immigration Policy on Labor Supply and Participation Rate
The report highlighted the dual impact of immigration restriction policies on the labor market:
Lowering Employment Equilibrium Point: The employment equilibrium point (the number of monthly new jobs needed to maintain a stable unemployment rate) has decreased from 210,000 last year to 140,000 this year, and is expected to drop to 70,000 in the second half of the year due to accelerated deportation actions.
Suppressing Labor Participation Rate: Strengthened immigration enforcement has created a "chilling effect," reducing the willingness of foreign workers to participate, thereby leading to a decline in the labor participation rate.
Morgan Stanley believes that with tighter immigration policies, the supply of low-skilled labor in the U.S. continues to decrease, which supports the downward trend of the unemployment rate but limits the overall flexibility of the labor market.
Federal Reserve Likely to Maintain a Wait-and-See Approach
In June, the U.S. saw average hourly earnings rise by 0.2% month-on-month, with the year-on-year increase slowing from 3.8% to 3.7%. Morgan Stanley pointed out that current overall wages are growing at an annualized rate of 5.1%, which can temporarily support consumer spending, but inflation driven by tariffs might erode actual purchasing power.
Morgan Stanley expects that under the current circumstances:
- The labor market, though slowing, has not shown significant slack;
- The unemployment rate remains low, with an average of 4.15% since Q3 2024, close to the June data;
- The Federal Reserve will focus on whether tariff-driven inflation erodes actual consumption ability.
Therefore, Morgan Stanley reiterates its stance that current data does not support a Fed rate cut in July, and expects the Fed to maintain its wait-and-see stance, waiting for further guidance from tariff and inflation data before deciding on policy adjustments.
