Crucial question for the market: What is the reason for the collapse of employment in the United States?

The U.S. job market is cooling down. Is it due to a lack of workers or a lack of jobs? Wall Street is in an uproar.

The previously released July non-farm payroll report showed that not only were new jobs significantly below expectations, but the numbers for May and June were also drastically revised down, bringing the three-month average of new jobs down to only 35,000, the slowest growth rate since 2020. The unemployment rate also rose to 4.2%, reaching its highest point since 2021. This result surprised Trump, who directly fired the head of the Bureau of Labor Statistics, accusing him of "faking" the data, despite there being no evidence.

The U.S. job market has recently cooled significantly. Is it due to "a shortage of labor supply" or "a decrease in labor demand"? Some believe it is due to a shortage of labor supply, such as tightened immigration policies leading to a smaller labor pool. Others believe it is due to an economic slowdown, meaning companies no longer need as many workers.

Wall Street is engaged in a heated debate over the reasons for the slowdown in U.S. employment, as it directly relates to whether the Federal Reserve will cut interest rates. One of the core tasks of the Federal Reserve is to stabilize the economy. If the issue is "not being able to find workers," then weak hiring does not necessarily indicate large-scale layoffs, and the Federal Reserve would not need to cut interest rates. However, if it is due to "a decrease in labor demand," then the Federal Reserve would need to cut interest rates to stimulate the economy.

The "Rashomon" in the Data: Both Sides Use Data to Argue, but No One Can Convince the Other

Wall Street is divided into two factions. The supply shortage faction, including Morgan Stanley, Barclays, and Bank of America, believes that the slowdown in hiring is more due to a decrease in labor supply, especially the impact of tightened immigration policies, and therefore expects the Federal Reserve to start cutting interest rates at least by December. On the other hand, the demand weakness faction, including Goldman Sachs, Citigroup, and UBS, interprets the cooling of employment more as a signal of weak labor demand, which may prompt the Federal Reserve to start cutting interest rates as early as September.

The employment report contains a wealth of statistical data, but none can directly prove which side is correct, allowing both sides to find reasons to support their views.

1. Supply Shortage Faction

In the past three months, the labor force participation rate has decreased by 0.4 percentage points, the largest drop in eight years, excluding the early pandemic period. The supply shortage faction views the decline in the labor force participation rate as evidence of reduced labor supply.

Morgan Stanley's chief economist Michael Gapen pointed out that the slowdown in job growth is not contradictory to the low unemployment rate when considering immigration controls. However, if hiring continues to cool rapidly, they may adjust their views.

The employment report includes a breakdown of "foreign-born versus native-born workers." This data shows that the number of foreign-born workers has decreased by about 1 million in the past three months. The White House sees this as a point to promote the success of its immigration policies. Stephen Miran, chairman of the White House Council of Economic Advisers, stated on August 1 that since the president took office, approximately 2.5 million jobs have been created for the native-born population, while about 1 million jobs for foreign-born individuals have been reduced. This is a result of our strong immigration and border policies, making America safer Federal Reserve Chairman Jerome Powell mentioned two days before the non-farm payroll report that as long as the unemployment rate does not rise significantly, the Fed will overlook the slowdown in hiring over the next few months. With a decrease in immigration, the monthly addition of jobs in the U.S. remaining at zero may be enough to keep the unemployment rate stable.

2. Demand Weakness Faction

Citigroup economist Veronica Clark emphasized that while the decrease in immigration does have an impact, the details show that demand weakness unrelated to immigration is worsening. Whether it is a slowdown in immigration or weak demand, both situations will lead to a decline in labor supply this year, as labor participation rates typically fall during economic downturns. However, if weak demand is the main cause, it would not be enough to prevent the unemployment rate from rising.

Several analysts, including the Bloomberg Economics research team, pointed out that the breakdown data of the "foreign-born and native-born" labor force in the report may have statistical biases, as the report also shows a sudden and significant increase in the native-born labor force and population, which is very unreasonable in reality. UBS Chief Economist Jonathan Pingle also noted, "It's not like we suddenly gave birth to a large number of 16-year-olds, causing a surge in the native population."

Analysts believe that due to the increasingly unreliable "population structure breakdown" data based on household surveys in the report, they are starting to pay more attention to another set of data—the hiring situation from business surveys, which was also significantly revised down for May and June. The best approach is to list the industries most reliant on immigrant labor and estimate whether their performance is significantly worse. However, the result is that different analysts conducting the same analysis have drawn different conclusions.

Bank of America found that hiring in construction, manufacturing, leisure, and hospitality sectors is weak, as these industries often employ undocumented immigrants and workers who have lost their legal status. However, Goldman Sachs pointed out that the performance of these industries is not worse than that of industries severely impacted by tariffs