Soft payrolls should ease overheating concerns

Research evidence excerpt

Not for redistribution without written consent of Morgan Stanley

M

Idea

August 7, 2026 07:55 PM GMT

Morgan Stanley & Co. LLC

US Economics Weekly | North America

Michael T Gapen

Chief US Economist

Soft payrolls should ease

overheating concerns

Sam D Coffin

Economist

Diego Anzoategui

Economist

Our view is that the strong payroll gains through May largely

reflected catch-up hiring after the 2H25 slowdown. July’s report

supports that view: labor demand has slowed since then. The

unemployment rate fell because supply also fell, but the decline

in LFPR might be partly noise.

Arunima Sinha

Global Economist

Heather Berger

Economist

Lingdi Xu

Economist

Key Takeaways

The tariff shock weighed on employment growth in 2H25, but hiring picked up in

1Q26 after firms passed most of the higher tariff costs through to prices.

That catch-up hiring now appears to be fading, with payroll growth slowing over

the past three months.

Labor supply has also retraced recently, though some of that weakness may

reflect noise, suggesting upside risk to the unemployment rate ahead.

The moderation in labor demand should help ease concerns among hawkish

FOMC members about labor market overheating.

Next week’s inflation report is key. We expect core PCE inflation of 0.24% m/m,

reflecting normalization after June’s downside surprise.

Exhibit 1:

Private payroll growth stalled last fall, made up for the slow hiring in

springtime, and has moderated in recent months

Private payrolls, change, 000s

300

Private payrolls

250

3-month average

200

150

100

50

0

-50

-100

23

24

25

26

Source: BLS, Morgan Stanley Research