The U.S. labor market showed significant cooling in June, with nonfarm payrolls increasing by only 57,000 jobs, well below the 110,000 forecast by economists, according to the Labor Department's Bureau of Labor Statistics. May's gain was revised down to 129,000 from the initially reported 172,000, and April's increase was revised lower by 31,000 to 148,000. The report was released a day early due to Friday's public holiday marking the United States' 250th anniversary of independence.
Unemployment Rate Drops but for the Wrong Reasons
The unemployment rate fell to 4.2% in June from 4.3% in May, but the decline was driven by approximately 720,000 people leaving the labor force, pushing the participation rate down to 61.5%—the lowest level since March 2021. Economists noted that the economy needs to create between zero and 50,000 jobs per month to keep up with working-age population growth, a figure that has dropped due to an immigration crackdown reducing the labor force.
Market Reaction and Fed Expectations
Financial markets dialed back expectations for a near-term interest rate hike from the Federal Reserve. Traders priced in less than a 20% chance of a rate hike in July and a roughly 60% chance in September, down from about 75% before the jobs report. The U.S. central bank last month left its benchmark overnight interest rate in the 3.50%-3.75% range, but updated projections indicated policymakers still expected to raise borrowing costs this year.
“Policymakers at the Fed have not articulated their reaction function, but they plainly won’t like this employment report,” said Christopher Rupkey, chief economist at FWDBONDS. “It is hard to keep track of which way the pendulum is swinging in the labor market as the stronger jobs picture just a month ago has suddenly weakened perhaps with the delayed reaction to the war in the Middle East.”
Sectoral Job Gains and Losses
Professional and business services led job gains with 36,000 positions added. Social assistance employment increased by 25,000, while healthcare payrolls rose 22,000—below the monthly average gain of 38,000 over the past year. Leisure and hospitality employment dropped sharply by 61,000, despite hopes that the FIFA World Cup tournament would boost hiring. The moderation in payrolls aligns with other labor market surveys, including small business hiring plans, which have offered a less-robust picture.
Layoffs Remain Low Despite Uncertainties
A historically low level of layoffs continues to be a key driver of payrolls gains. Companies have been reluctant to let go of workers after struggling to find labor following the COVID-19 pandemic, despite uncertainties from tariffs last year and the ongoing Middle East conflict. The Conference Board survey on Tuesday showed the share of consumers viewing jobs as “hard to get” near a 5-1/2-year high in June, flagging the drop in unemployment.
