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- The U.S. Has A Labor Force Problem
The U.S. Has A Labor Force Problem
The Macro Institute's Weekly Economic Primer
The Macro Institute
July 28, 2025
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This might be the busiest week of the year for economic data and market-moving events. Oddly enough, it’s unfolding right in the middle of Q2 earnings season in late July, but summer or not, we’re locked into the data!
All eyes will naturally be on the FOMC meeting and Friday’s July payroll report. We also get several PMI releases, including the ISM on Friday, the first look at Q2 GDP on Wednesday, and the core PCE deflator on Thursday.
Two Tuesday releases that may fly under the radar (but shouldn't) have big implications for wage inflation. With over a million foreign-born workers exiting the U.S. labor force in recent months, the potential impact on wages is no small matter.
The Conference Board’s Consumer Confidence report deserves attention, particularly its “Jobs Hard to Get” and “Jobs Easy to Get” components. These are excellent leading indicators of wage pressure. Along with the QUITS rate from the JOLTS survey, arguably the single best leading indicator of wage trends, these releases provide some insight into how immigration policy may be shaping the economic landscape.
The Macro Week In Review
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The Macro Week Ahead
💣 Trade War (What Is It Good For?)
Edwin Starr’s 1970 protest anthem “War” asked a powerful question. What is it good for? In our report this week for our institutional clients, we borrow that title and turn it toward the growing global trade tensions. With new U.S. trade deals escalating friction around imports and consumer prices, and the rest of the world increasingly trading amongst themselves, it’s time to rethink geographic exposures in portfolios.
One key takeaway: companies with high foreign sales exposure may become more attractive as domestic inflation pressures build. U.S. labor markets remain historically tight, and the supply of foreign-born labor, long a release valve for wage pressure, is shrinking. Together, these forces lay a firm foundation for sticky core inflation, a crucial data point for the Fed. The result is a showdown between relatively hawkish U.S. fundamentals and a dovish financial market that’s already priced in 50 bps of rate cuts by 2026. In our view, that divergence calls for caution. U.S. equities are pricing in a dovish pivot that may not materialize anytime soon.
📆 This Week In Context
Stay focused this week. It’s jam-packed with economic data, earnings, and a Fed meeting. Soft survey data has been steadily surprising to the upside since late April, as reflected in Bloomberg’s Economic Surprise Index. (Learn more about soft data here). This indicator represents reality versus expectations, so some of the increase can be chalked up to beating a relatively low bar post-Liberation Day, but it still speaks to a pickup in sentiment.
Regional PMIs are hovering around the neutral 50 mark, and consumer confidence continues to rebound. Retail sales are posting low-to-mid single-digit growth, underpinned by solid credit availability and a healthy labor market (unemployment is still near 4.1%). So far, tariffs haven’t put much of a dent in consumption, but Core CPI rose to 2.9% year-over-year in June, and we expect more price pressure coming this fall. Add in dollar weakness (which drives up import costs), and the inflation outlook looks anything but benign.
💼 Jobs Week
The U.S. labor market remains tight (and likely will for the foreseeable future). On Tuesday, we get the June JOLTS data, including the quits rate, which bottomed out at 1.9% last November and has since climbed to 2.1%. That’s a subtle but important signal of growing employee confidence and wage bargaining power. Wage growth is hugely important right now as it’s a key component of inflation.
June’s ADP report showed job growth slowing but noted that “the slowdown in hiring has yet to disrupt pay growth.” The July update is out Wednesday morning, with expectations for a rebound to 80k private-sector jobs. But the market will be laser-focused on Friday’s Nonfarm Payrolls. June’s +74k private jobs beat expectations (-33k) and softened rate-cut bets. The consensus for July is 109k, with unemployment expected to tick up to 4.2%.
We’ll be especially focused on the native vs. foreign-born labor force breakdown. Over the last three months, the U.S. has lost nearly one million foreign-born workers. That drop in labor supply is a key driver of upward wage pressure.
📈 Inflation & The Fed
Wednesday at 2:00 pm, we get the FOMC’s rate decision and Chair Powell’s press conference. We don’t expect a cut, and neither does the consensus. From our perspective, the Fed simply doesn’t have the data to justify easing right now.
Looking ahead, the Fed likely anticipates some cyclical softening in labor markets and modest tariff-driven inflation. Weakness in employment would be the likely catalyst for the 50 bps of rate cuts expected by the market in 2025, but that scenario hasn’t materialized, and the Fed will likely remain patient. Our framework suggests that the macro backdrop argues for a more hawkish Fed stance, but Bloomberg’s language processing model suggests that is not the tone coming from Fed officials.
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