July showed little job growth, with payrolls and unemployment holding relatively steady: payrolls fell by 23,000 jobs, and the unemployment rate dropped to 4.1%. Coming off a June that added only 57,000 jobs, and with estimates of around 80,000 being added in July, we are slowly seeing a decline in an already tight labor market.
While this is important to some, what matters more is how the Federal Reserve digests this information and how it impacts its upcoming decisions. Lately, Warsh and his team have expressed confidence in the health of the labor market and have focused on keeping inflation low, hinting at potential rate hikes soon. While the Fed’s long-lasting dual mandate ensures that both price stability and low unemployment are at the forefront of their work, many believe that the Fed’s current focus is squarely on inflation. While we believe that is the right call, it is also important to ensure that the labor market continues to create enough jobs for young Americans working to establish careers. Months of ignorance can compound quickly and make for irreparable labor market outcomes.
One statistic that we have been monitoring here at the Colby Financial Review is the labor force participation rate, that is, the active portion of our economy’s working population. It has shrunk to a jaw-dropping 61.5% as of June, the lowest since March of 2021, when the US economy was knee-deep in the COVID-19 shock. Omitting that data point, the last time our participation rate was that low was over fifty years ago in June of 1976. Another related plunge we’ve noticed is the “prime-age” participation rate, a cohort that includes workers in their “prime years” of 25 to 54, at its lowest since December of 2023 and the biggest monthly drop since April of 2020, just after the pandemic was declared.
So What?
Numbers are one story; the implications are another. A falling labor force participation rate does not always signal weakness. Some of this drop is due to the so-called baby boomer retirements and the effects of an aging population, a structural trend that has been on economists’ radars for years. However, the steepness of the decline hints at something deeper than demographics alone. If a sizeable portion of the “prime-age” workers are stepping back from the labor force, whether due to discouragement, caregiving, or a lack of suitable options, that is a key signal that the Fed cannot fully take it in by looking at the unemployment rate alone. A low unemployment rate can hide a shrinking workforce just as easily as it can display a healthy one. If Warsh and his FOMC decide to pursue rate hikes in the coming months, especially while treating the labor market as an afterthought, they risk pressuring an economy already showing cracks, particularly among the younger working population and new entrants to the workforce. For the generation entering the job market now, it is not an abstract concern but one that determines whether young graduates will be absorbed or watch from the sidelines.
The Fed has never had it easy, but Warsh’s early tenure behind the podium is proving that a narrow focus can be the root cause of missed opportunities. Inflation is important, and the case for it is quite legitimate, but the labor market numbers give us a subtle reminder that the dual mandate is not optional.
The Fed should be wise to keep a close eye on both aspects in the coming months, because while the headlines may focus on interest rate changes due to inflation, the damage to the labor market may already be done. The Fed can afford to misread one data point, but not an entire generation.
