The July nonfarm payroll report paints a picture of distinctly slowing job growth, with both demand and supply side pressures emerging in the labor market. Jobs grew by just +73k in July, below consensus of +147k. All told, 100% of job growth came from one sector this month, which re-emphasizes our view about the lack of breadth in job creation. Even more importantly, the report revised down estimates for the prior two months by an outsized -258k.
- Net of these revisions, the economy created fewer than 20k new jobs in May-June. Such a weak run of job creation outside of recession is unprecedented in the postwar U.S. With that said, amid the weak job creation noted above, the unemployment rate has actually held steady at a 4.2% run-rate since March. So, while jobs are scarce, so are workers. We also see this tension in other areas: average hourly earnings actually accelerated to 3.9% y/y from 3.8% last month.
- The stark revisions downward in job growth – yet coupled with increasing wage cost – underscore our Regime Change thesis. This time is different, and it speaks to why the Fed likely feels the decision is so hard. From our vantage point at KKR, however, we hold the strong belief that the Fed needs to start cutting. As such, we believe that the Fed will cut in September and a total of five times total over the next 18 months.
- We remain in a manufacturing recession, with jobs in this area including both total goods and manufacturing negative for the third month in a row (and now ISM manufacturing has been below 50 for 30 of the last 32 months). Hopefully, the administration and the Fed are aware that the combination of higher rates and tariffs is an unattractive mix for this sector of the global economy.
- Services over goods. 79,000 of the 73,000 total jobs, so overall 100% of job growth, and 95% of private sector growth (79,000 of 83,000) came from Healthcare/ Education. However, the overall breadth of services has narrowed with professional services showing a negative 14,000 jobs and leisure/hospitality falling to just 5,000 this month. Importantly, we feel like the narrowness of recent job growth was glossed over by reporters and the Fed on Wednesday during its briefing.
- The wage increase is the fly in the ointment. Because of demographics and slower immigration, unemployment is remaining low and wages are going up, despite weaker hiring. This conundrum is the one signal on why the Fed should wait, but the Fed’s sliding scale of inflation relative to job growth now suggests protecting jobs likely makes more sense, in our view. We believe the cumulative impact of higher rates now overwhelms inflation running above trend.
What do we think this means for markets?
We continue to see the dollar weaker. However, while markets may pull back, we don’t think the cycle or the market’s ascent is over. We stick to our outlook of 1.5-2.0% US GDP this year, and mid-1% in 2026. While growth is slow, we remain encouraged that ‘you can only get so hurt falling out of a basement window,’ given that construction spending is not in a bubble, and private sector leverage levels are modest. We’re also encouraged by the ongoing strength we’re witnessing in productivity related investment across software and IT and industrial equipment. As such, we still think that credit spreads stay generally tight. In this Regime Change, we want to own more collateral that is linked to nominal GDP. We also want to ‘Make Our Own Luck’, executing on more corporate carve-outs, capital heavy to capital light, productivity, and the security of everything.