David Kelly, chief global strategist at J.P. Morgan Asset Management, uses his Monday commentary to take apart three contradictions in the July jobs data: why job growth is so weak when GDP is growing at its pre-pandemic pace, why unemployment keeps falling anyway, and why wages are not rising in a market the Fed chairman has just called fully employed. He closes on what that means for growth, for inflation and for the September rate decision.
👤 Speaker: David Kelly, chief global strategist at J.P. Morgan Asset Management, who writes and records the firm's weekly Notes on the Week Ahead commentary
📰 Published: 31 August 2026 on the show's own feed
🟢 Spotify | 🟣 Apple Podcasts | 🔗 Episode page | 🔗 Show notes | ⏱️ 10 min
Key Takeaways
Kelly does not dispute Warsh's full-employment reading, only what follows from it
Warsh's line at Jackson Hole on Friday was that "labor markets are consistent with full employment"
The unemployment rate is the lowest in 18 months and lower than it has been 88% of the time over the past 50 years
Real GDP has grown at its pre-pandemic pace for two years while payroll growth has run at about half the old rate
0.75% a year in the 20 years before the pandemic, against 0.39% over the past two years, or likely 0.37% after last Friday's benchmark revision
A workweek that stopped shrinking closes more than half the puzzle before AI is invoked at all
"So instead of having to explain a 0.38% gap, we only have to explain a 0.16% gap."
The growth that did happen was in equipment and intellectual property, which do not need many workers
Spending in those areas rose at a 7.9% annual rate over the past two years, more than six times faster than the rest of the economy
46,000 jobs a month lowers unemployment only because the labor force has almost stopped growing
The population aged 16 and over rose by a reported 277,000 a month; the labor force by 29,000
"That is to say, if the labor force participation rate hadn't fallen over the past two years, the U.S. labor force would have grown by 157,000 more people per month and would now be 3.7 million larger."
Aging, not discouragement, accounts for most of the drop in participation
Holding the age structure fixed would cut the 1.34-point fall to 0.59 points
"While the labor force participation rate of those aged 18 to 64 only fell by 0.34 percentage points over the past two years, the participation rate for those over the age of 65 fell by 1.13%."
Expiring jobless benefits quietly move people out of the measured labor force
Benefits generally run up to 26 weeks and require active job search, which is what a survey respondent then reports
He does not trust the population figures the participation arithmetic rests on
"Even after doing this, they projected continued growth in the 16+ civilian population at an average pace of 100,000 per month so far this year which we believe is too high."
Wages are weak because workers do not believe the market is tight, and few of them bargain collectively
Average hourly earnings rose 3.15% year over year in July, below CPI inflation for a fourth consecutive month
Fewer than 7% of private sector workers were represented by a union in 2025
Weak wage growth is precisely what rules out a price-wage spiral
"If higher prices for goods and services don't flow through to higher compensation, it is impossible for the economy to generate a price-wage spiral."
Weak demographic and job growth should also lift rental vacancy rates and hold down owners' equivalent rent
He reads September's pricing as early, while still allowing for a policy mistake
"Given this, markets may have been premature in now assigning a 60% probability to a September rate hike, up from 40% at the start of last week."
"While investors should be prepared for possible policy mistakes, there is little in the labor market to suggest inflationary trouble ahead."
Warsh Called It Full Employment; Kelly Calls It Full Employment and Very Strange
Kelly opens on Kevin Warsh's Jackson Hole keynote of the previous Friday, in which the Fed chairman said "labor markets are consistent with full employment". He does not argue with the assessment. The unemployment rate, at 4.1%, is the lowest it has been in 18 months and lower than it has been 88% of the time over the past 50 years, and on those numbers, he says, the chairman is hard to contradict.
The disagreement is about what the reading implies, not whether it is right. "However, it is a very strange labor market and it is important for investors to unravel its apparent contradictions in order to assess what it really means for economic growth, inflation, monetary policy and, ultimately, investment performance and risks."
Three questions organize the rest of the commentary, and he takes them in order
Why job growth is so weak in a moderately-growing economy
Why the unemployment rate is so low given that weak job growth
Why wage growth is not stronger if the labor market really is this tight
Same Growth Rate as Before the Pandemic, Roughly Half the Job Creation
In the 20 years before the pandemic, real GDP grew at an annual pace of 2.11% and payroll employment grew 0.75% a year. Over the two years that ended in the second quarter of 2026, GDP grew at an almost identical 2.09% while payroll jobs climbed just 0.39% a year, or likely 0.37% once a small benchmark revision announced the previous Friday is applied. The economy produced the same growth and about half the jobs.
Four Reasons the Jobs Did Not Follow the Growth
Kelly says the answer is most likely composed of four parts, and the first one does most of the work.
The average workweek reversed direction, which closes most of the gap on its own. Over the first 20 years of this century the 0.75% annual rise in jobs came alongside a 0.12% annualized decline in the average workweek for private sector production and nonsupervisory workers, so total hours worked grew about 0.63% a year. Over the past two years that workweek rose by 0.10%, putting total hours growth at about 0.47%
"So instead of having to explain a 0.38% gap, we only have to explain a 0.16% gap."
Second, the hiring slowdown coincided with severely restricted labor supply. "This very likely does force productivity gains as employers are forced to make the most of the labor they have."
Third, he allows that some productivity gains may have come directly from AI, and puts it no more strongly than possible
Fourth, the growth was concentrated in categories that need few workers. Investment in equipment and intellectual property is neither labor intensive, and spending in those areas has increased at a 7.9% annual rate over the past two years, more than six times faster than the rest of the economy
Falling Participation Is Why 46,000 Jobs a Month Still Lowers Unemployment
Monthly data sharpen the second mystery. Average monthly payroll growth ran at 88,000 in the first 20 years of this century and at just 46,000 over the past 24 months, and yet the unemployment rate fell last month to 4.09%, an 18-month low, down from 4.21% in July 2024.
"How can 46,000 new jobs per month be enough to reduce the unemployment rate?"
The answer, on the government's own data, is a labor force that has almost stopped growing. Over the past two years the civilian population aged 16 and older rose by a reported 277,000 a month while the labor force — those working or actively looking — rose by just 29,000 a month
Participation fell from 63.18% in July 2024 to 61.84% in July 2026, a drop of 1.34 percentage points
"That is to say, if the labor force participation rate hadn't fallen over the past two years, the U.S. labor force would have grown by 157,000 more people per month and would now be 3.7 million larger."
Most of the Missing Workers Are Retirements, Not Discouraged Job Seekers
"The big reason is the aging of the population." Participation falls sharply at the traditional retirement age of 65 and keeps falling after it, and the baby boom generation is crossing that threshold
Holding the age structure of the civilian population constant across five broad age groups, he says, would have cut the 1.34-point fall in participation to 0.59 points on its own
The within-age-group numbers point the same way. "While the labor force participation rate of those aged 18 to 64 only fell by 0.34 percentage points over the past two years, the participation rate for those over the age of 65 fell by 1.13%."
He offers two readings of the over-65 drop and hedges both: stock market gains that let people retire who could not previously afford to, or simply boomers who were not ready to stop at 65 finally stopping at 70
The last piece is a measurement effect rather than a behavioral one. Jobless benefits generally run up to 26 weeks and require active job search, which gives a recipient a reason to tell a government survey they are looking
"However, once those benefits have expired, there is less incentive to do so, and so they may officially drop out of the labor force altogether."
The Population Numbers Underneath the Participation Math Move in Jumps
A footnote carries the caveat, and it is the sharpest thing in the piece about the data itself. Kelly says a second reason for falling participation over the last 18 months is almost certainly a sharp falloff in working-age population growth caused by the immigration crackdown, and that it does not show up across the full two years because of how the Bureau of Labor Statistics models population change.
"While these raw population numbers should be treated with a great deal of skepticism, the labor force participation rate, which is based on the monthly current population survey should be less problematic."
Every January the BLS makes a one-time adjustment to incorporate the errors that crept into Census population estimates over the prior 12 months, then projects population growth for the rest of the year
"This, of course, introduces massive discontinuities into their numbers."
At the start of 2025 the BLS recognized it had seriously underestimated net migration in 2024 and raised its December 2024 population estimate by 2,871,000; at the start of 2026 it cut its December 2025 estimate by 231,000 to reflect the reversal
He thinks the agency is still projecting too fast. "Even after doing this, they projected continued growth in the 16+ civilian population at an average pace of 100,000 per month so far this year which we believe is too high."
Wages: Workers Do Not Feel the Tightness, and Few of Them Bargain Together
In July, average hourly earnings for all private sector workers were up just 3.15% year over year, the smallest gain since May 2021 and below the year-over-year CPI inflation rate for a fourth consecutive month. Against record corporate profits, a growing economy and a labor market he has just described as very tight, Kelly asks why workers cannot get more.
"Part of the answer may be that workers just don't recognize that it is a tight labor market."
In July the Conference Board survey put the gap between those saying jobs were plentiful and those saying they were hard to get higher than it has been only 62% of the time over the past 50 years — against an unemployment rate lower than 88% of the time over the same period
Hiring is low even though unemployment is, so workers may be finding it unusually hard to move to another job that pays more
"Another part of the answer is that workers don't have the same union representation as in the past." Fewer than 7% of private sector workers were represented by a union in 2025, leaving the rest to bargain for themselves
Investment Implications: Less Momentum, No Price-Wage Spiral, and CPI Heading Down
Kelly flags that these mysteries were particularly notable in the July 2026 report, and that Friday's August report could well show better payroll job growth, a higher unemployment rate and stronger wage gains if data collection and seasonal adjustment made some of the July readings extreme. "However, the broad trends will likely remain."
"This suggests, first, that the economy doesn't have quite as much momentum as Kevin Warsh suggested in his Jackson Hole speech."
Anemic job and wage growth will keep suppressing demand for houses, light vehicles and a host of other consumer goods and services, particularly once the stimulus from income tax refunds and tariff refunds has faded
"Very slow job growth probably makes the economy somewhat more vulnerable to recession also."
The wage weakness is the load-bearing point for inflation. "If higher prices for goods and services don't flow through to higher compensation, it is impossible for the economy to generate a price-wage spiral."
Weak demographic and job growth could also push rental vacancy rates up, holding down rent growth and, through it, owners' equivalent rent, which he says should keep CPI on a downward track
On the rate decision, he reads the market as ahead of itself. "Given this, markets may have been premature in now assigning a 60% probability to a September rate hike, up from 40% at the start of last week."
"While investors should be prepared for possible policy mistakes, there is little in the labor market to suggest inflationary trouble ahead."
Kelly's bottom line is that a labor market that looks fully employed is one running short of workers rather than short of slack, and that a job market producing neither jobs nor wage gains points to slower growth and cooler inflation than the Fed chairman described on Friday.
Products, Companies & Tools Mentioned
The Federal Reserve (Chairman Kevin Warsh's Jackson Hole assessment is the starting point of the piece and the thing its investment section argues with)
The Bureau of Labor Statistics (Source of the payroll, participation and earnings data, and, in his footnote, the agency whose January population adjustments introduce "massive discontinuities into their numbers")
The Conference Board (Its consumer survey is his evidence that workers do not perceive the tightness the unemployment rate implies)
The Census Bureau (Whose population estimates the BLS corrects for each January, in his account of why the population series moves in jumps)
Books & Resources Mentioned
Kevin Warsh's 2026 Jackson Hole keynote (The Friday speech he quotes and then disputes, including the line that labor markets are consistent with full employment)
The Employment Situation report (The July release the whole commentary works from, and the August one due out on Friday that he says could look better on every count)
The Conference Board's US consumer confidence survey (Where the plentiful-versus-hard-to-get jobs gap he cites comes from)
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