Want to know where the economy is heading? It’s all about earnings.
June jobs data handily beat expectations. But the report was full of asterisks. What matters is tariffs, inflation, and corporate profits.
Lies, damned lies, and government statistics, Mark Twain might have been moved to say if he were around to read June’s employment report. For a clearer view of the job market—and the overall economy—look to earnings season, which begins in two weeks, instead.
There was nothing wrong with the jobs report, at least not on the surface. The Bureau of Labor Statistics reported 147,000 nonfarm jobs were added in June, well above the consensus guess of 106,000 from economists surveyed by Bloomberg, which had been pared by the time of the report’s release on Friday. Revisions didn’t mar the report, either. The two preceding months’ payrolls tally were revised up by 16,000, a trivial change but positive in direction.
Still, the big beat should have a big asterisk affixed to it. Private businesses increased their payrolls by only 74,000 in June, well short of the 100,000 forecast, with less than half of industries adding jobs. The big boost came from state and local education jobs, which jumped by 63,000. That, however, was after a seasonal adjustment, which presumes that many teachers would be off for the summer by the time of the BLS survey week—seven days that incorporate the 12th of the month. Unfortunately, for youngsters and the data, schools were still in session in most places this year, inflating the total. Step back, and the overall trend in private payrolls has slowed since early 2024, settling to a 12-month average around 120,000.
Other factors also paint a dim view of the job market. The average workweek, for instance, dipped by 0.1 hours in June, to 34.2 hours, which effectively offsets some of the month’s payroll rise. Aggregate hours worked slipped by 0.3%, the weakest since last July, according to TLRanalytics. Average hourly earnings also rose by a smaller-than-expected 0.2% in June, compared with 0.4% in May. “When you tack on the decline in hours worked, average weekly earnings—the proxy for work-based personal income—slipped 0.1%," David Rosenberg, founder of Rosenberg Research, wrote in a client note.
The unemployment picture also deserves its own asterisk. In the latest month, the headline jobless rate, which is derived from a separate survey of households, ticked down 0.1 percentage point to 4.1%, the low end of the range between that level and the 4.2% that has been in place over the past year. The workforce, however, contracted by 130,000 people, lowering the labor-force participation rate to 62.3% of the adult population, well under the 12-month average, and below the 63% average of the 2020 period before the Covid-19 pandemic.
Blame the boomers—and older Gen-Xers—for that. The over-55 participation rate has fallen to a 19-year low of 38%. Meanwhile, the “prime-age" (25-54) participation rate ticked up to 83.5%, surpassing its pre-Covid level and near its late-1990s peak.
Immigration, or lack thereof, has also affected labor supply in recent months. Since March, the foreign-born civilian labor force has declined by 1,147,000, to 32,572,000, offsetting much of the 1,836,000 increase in the native-born labor force over that span.
It’s a muddled picture, one that suggests that demographics and policies have slowed U.S. labor supply while uncertainty over future tariffs may have curbed labor demand. Clues for how this stasis plays out should emerge in the earnings reporting season set to kick off later this month, says Torsten Sløk, chief economist at Apollo Global Management.
One question that needs to be resolved: the case of the missing tariffs. The levies currently are raising about $30 billion a month, or almost $400 billion at an annual rate, Sløk points out in an interview. The mystery is that these big numbers aren’t showing up in the inflation data—the consumer price index rose a smaller-than-expected 0.1% in May, the month after April 2 Liberation Day—or in profits numbers. The $400 billion in annualized tariffs, meanwhile, make up about 20% of the $2 trillion in aggregate profits made by S&P 500 companies, Sløk says. Yet, analysts have been lifting their earnings estimates for the S&P 500 in the past two months. Earnings conference calls should shed light on who’s paying the tariffs, Sløk says, and how much they are being passed along. (More clarity also may come after 90-day tariff suspension ends on July 9.)
The Federal Reserve, too, is waiting for clarity. At a European Central Bank conference this past week, Fed Chair Jerome Powell said the central bank “went on hold when we saw the size of the tariffs and essentially all inflation forecasts for the United States went up materially as a consequence of the tariffs." Those concerns are reflected in the latest Summary of Economic Projections issued in June, which looked for the personal consumption expenditure gauge of inflation to run at 3% and the unemployment rate to rise to 4.5% by year-end.
Odds still strongly favor a quarter-point cut, from the current range of 4.25% to 4.5%, in September, with another such move in December, according to the CME FedWatch site and the Fed’s own projections. But the already slim expectations of a cut in the central bank’s federal-funds target at its next policy meeting, concluding on July 30, faded on Friday following the jobs report, despite President Donald Trump’s increasingly strident criticisms of Powell.
For those interested in how the economy and the job market evolve from here, skip over the government data and watch the earnings. That goes for Powell too.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
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