Morgan Stanley comments on non-farm payrolls: Anti-immigration lowers unemployment rate, the Federal Reserve will focus on the subsequent impact of tariffs on inflation and consumption

The latest employment report shows a slowdown in private sector employment, but the labor market is tightening. Morgan Stanley believes this is mainly due to a decline in labor supply caused by tightening immigration policies. The Federal Reserve will maintain a wait-and-see stance, continuing to wait for data on tariffs' impact on inflation and consumption.

On July 4th, according to news from the Chasing Wind Trading Desk, Morgan Stanley stated in its latest research report that non-farm payrolls increased by 147,000 in June, exceeding expectations; however, private sector employment only increased by 74,000, below the average of 128,000 in the previous three months. This is mainly due to the impact of tightening immigration policies on labor market supply.

Regarding the unemployment rate dropping from 4.24% to 4.12% in June, Morgan Stanley stated that this decline is not due to an increase in job opportunities, but rather a decrease in the labor participation rate, which is also due to tightening immigration policies that have reduced the willingness to participate in the labor force.

As for the Federal Reserve's view, Morgan Stanley believes that this data does not support a rate cut in July, and continues to expect that the combination of rising inflation driven by tariffs and low unemployment will keep the Federal Reserve in a wait-and-see mode.

The Dual Impact of Immigration Policies

An earlier article from Wall Street Insight mentioned that the U.S. non-farm payrolls increased by 147,000 in June, higher than the market's general expectation of an increase of 106,000. From an industry perspective, job growth in June was mainly concentrated in state government and healthcare sectors. Among them, government employment increased by a total of 73,000.

Morgan Stanley's report states that the slowdown in private sector employment, below the average of the previous three months, is mainly led by the service industry. Employment in the service sector has slowed across the board, with all service categories showing increases smaller than in May or experiencing larger declines, except for retail and transportation.

In this regard, Morgan Stanley believes that the U.S. labor market presents a seemingly contradictory situation: private sector employment growth has significantly slowed, but the labor market has actually become tighter.

Regarding the "divergent pattern" in the labor market, Morgan Stanley believes this is mainly due to tightening immigration policies, which have led to a decline in labor supply.

In summary, the report points out that immigration restriction policies have twofold impacts on the labor market:

1. Lowering the employment balance point: Morgan Stanley states that the employment balance point (the job growth rate needed to maintain a stable unemployment rate) has decreased from 210,000/month last year to 140,000/month this year.

Morgan Stanley expects that due to accelerated deportation actions in the second half of the year, the employment balance point will further drop significantly to 70,000/month by the end of the year.

1. Suppressing the labor participation rate: Strengthened immigration enforcement has a "chilling effect" on the labor participation rate, as the risk of deportation has reduced the willingness to participate in the labor force. The decline in the labor participation rate in May and June was mainly caused by a decrease in the participation rate of foreign workers

The Federal Reserve Will Continue to Wait and See

In the non-farm payroll report released yesterday, the average hourly wage in June increased by 0.2% month-on-month, with the year-on-year growth rate dropping from 3.8% to 3.7%.

Morgan Stanley stated that overall wage income is still growing at an annualized rate of 5.1%, which is basically in line with the previous two quarters, temporarily supporting the growth of consumer spending.

However, Morgan Stanley warned that as tariffs drive inflation higher, real purchasing power will be eroded. If the labor market continues to gradually cool while inflation accelerates, real consumption growth is expected to slow down by the end of the year.

Morgan Stanley believes that current data does not support a rate cut by the Federal Reserve in July and maintains the judgment that the Federal Reserve will remain on hold. Key reasons include:

Although labor input is gradually slowing, it has not created significant market loosening;

The unemployment rate remains low, averaging 4.15% since the third quarter of 2024, which is not much different from June's 4.12%;

The Federal Reserve will focus on the subsequent impact data of tariffs on inflation and consumer spending