A closer look at non-farm payrolls: The U.S. job market is far from as strong as the "surface data" suggests

Barclays stated that the non-farm employment data appears strong on the surface, but deeper details reveal signs that the labor market is gradually cooling. The bank believes that the likelihood of the Federal Reserve holding steady in July has significantly increased, and interest rate cuts may wait until December.

On July 4th, according to news from the Wind Trading Desk, Barclays mentioned in a research report that the 147,000 new jobs added in June exceeded expectations, but nearly half came from government sectors, while the private sector only added 74,000 jobs.

The report pointed out that the June household survey data presents a more complex employment situation, with the decline in the unemployment rate mainly due to a decrease in the labor participation rate, and the underemployment rate remaining high, indicating some slack in the labor market, although other indicators do not reflect this.

Barclays also found that wage growth slowed in June, and the average working hours decreased, leading to stagnation in wage income growth, raising concerns about consumer spending.

Despite signs of weakness in the June employment report, Barclays believes that these are still insufficient to prompt the Federal Reserve to consider interest rate cuts at the upcoming July meeting, maintaining the forecast that the next rate cut will wait until December, while also needing to pay attention to the upcoming inflation data.

Industry Divergence Reveals Structural Issues

The report stated that the headline number of the June non-farm employment report is indeed impressive, with 147,000 new jobs added, exceeding Barclays' expectation of 100,000 and the market consensus of 106,000. Moreover, the three-month moving average reached 150,000, an increase from 130,000 in the same period last year.

However, the composition of the data is concerning. Government sectors contributed nearly half of the employment growth, adding 73,000 jobs, most of which came from state government education departments. Barclays analysts believe:

The surge in state government education employment occurred in months typically associated with seasonal layoffs, raising questions about whether seasonal adjustments were sufficient. If adjustments are inadequate, this employment growth may reverse in July.

Meanwhile, private sector employment growth significantly slowed from 137,000 to 74,000. The slowdown in private sector employment growth is mainly concentrated in the service industry, which only added 68,000 jobs in June. The goods-producing sector added 6,000 jobs, with construction increasing by 15,000, but manufacturing decreased by 7,000 and mining decreased by 2,000.

Within the service sector, education and healthcare services added 51,000 jobs, and leisure and hospitality services added 20,000, but professional and business services decreased by 7,000 jobs. Barclays believes that this divergence reflects the complexity of economic structural adjustments.

Household Survey Data Presents a Complex Picture

It is well known that the U.S. non-farm employment report is mainly divided into two survey data: the establishment survey and the household survey. The establishment survey results show non-farm employment growth data, while the household survey shows unemployment rate data Barclays believes that household survey data shows a more complex employment situation. The unemployment rate fell by 13 basis points to 4.1%, which appears to be a positive signal. However, this decline is mainly due to a decrease in the labor force participation rate, with the labor force shrinking by 130,000, while household employment only increased by 93,000.

The broader measure of underemployment (U6) slightly decreased to 7.7%, but remains at a relatively high level, indicating some slack in the labor market, which is not fully reflected in other indicators.

The labor force participation rate fell by 0.1 percentage points to 62.3%, mainly reflecting a decline in participation rates among the 16-24 age group and those aged 55 and older.

Barclays expects the unemployment rate to peak at 4.3% in the third quarter, with monthly job growth slowing to 75,000 by the end of the year, primarily affected by tariffs and immigration policies on economic activity and hiring. The bank stated:

The relatively moderate expectation of rising unemployment is partly due to a sharp decrease in immigration inflows and the drag of an aging population on labor participation.

Wage Growth Losing Momentum Raises Concerns for Consumer Spending

Wage data shows more evident signs of cooling in the labor market. In June, average hourly earnings increased by 0.2% month-on-month and 3.7% year-on-year, significantly down from a 0.4% month-on-month increase in May.

Barclays' state space model indicates a potential monthly wage growth rate of 0.27%, equivalent to an annualized growth rate of 3.3%, which is basically flat compared to previous months.

More concerning is the outlook for total income. The average workweek decreased by 0.1 hours to 34.2 hours, and combined with job growth, total hours worked fell by 0.3% month-on-month. This change, along with slowing wage growth, led to wage income growth stagnating in June, marking the weakest performance since July of last year.

As the rebound effect of working hours at the beginning of the year fades, the annualized growth rate of wage income over three months has dropped to 3.0%, halving from the 6.0% growth rate during the December to March period. However, private sector wage income still saw an annualized growth of 4.5% over the past six months, remaining above the inflation level