The U.S. job market is experiencing a significant slowdown, with July adding only 73,000 jobs, far below the anticipated 100,000, and previous months' figures for May and June were revised down by 258,000. This indicates a contraction in labor supply, not just demand, with the average monthly job gain for the last three months now standing at just 35,000. Despite this, the unemployment rate in July was 4.2%, and wage growth remained near 3.9% year-over-year, suggesting a tight labor market.
A key factor contributing to the shrinking labor supply is changes in immigration rules. Two major programs that granted temporary work rights to nearly 1.8 million immigrants are being phased out, potentially reducing the labor force by over 1 million workers. The labor force participation rate for foreign-born workers dropped by 1.2% in July compared to a 0.3% decline for native-born workers. Additionally, the aging population, particularly the retirement of baby boomers, further exacerbates this decline, with the population aged 18 to 64 projected to fall by 0.2% in the year ending July 2026 if net immigration is zero.
This scarcity of workers could lead to slower economic growth, as the U.S. economy's average annual growth of 2.1% has historically relied on a 0.8% annual increase in workers. With potentially no growth in workers in the next five years, economic expansion will be constrained. This scenario also presents a challenge for the Federal Reserve; a sharp decline in labor supply combined with expansionary fiscal policies could sustain inflation above 3.0% into 2026, forcing the Fed to be cautious about lowering interest rates despite a slowing economy. Investors are advised to diversify away from frothy U.S. assets.
