U.S. job growth slowed in June, and the unemployment rate ticked higher after rising to a more than two-year high in May. Today’s payroll data combined with last month’s milestone in the labor supply present emerging signs of a labor market normalization following a stronger than expected start to the first half of the year.
The Labor Department reported Friday that 206,000 new jobs were added in June, essentially in-line with expectations. The report also included a combined 111,000 downward revision to the figures reported in both April and May. The dataset serves as a break of the more positive growth trend seen in the previous months. It also coincides with lower than expected additions per the ADP report that was released on Wednesday.
In the short trading day Wednesday before the holiday close, equity markets ended higher with yet another record in the books. The Nasdaq Composite (NDX) and the S&P 500 (SPY) both achieved their 23rd and 33rd record close of the year. The most recent increases were fueled in part by a furious rally in shares of Tesla (TSLA), which gained another 6.5% Wednesday after closing 10% higher on the day prior following an update on deliveries that was better than feared. Markets were also buoyed higher by the cooler than expected ADP private-sector employment report.
With many traders taking an extended day following the holiday, indexes were quieter in the pre-market trading hours on Friday. The Dow Jones Industrial Average (DJIA) was up about 30 points after ending the day flat on Tuesday, while both the S&P 500 and the Nasdaq also appeared to be taking a breather on the lighter trading day. Yields on the 10-Year Treasury note declined to 4.31% from 4.346% on Tuesday.
With the Federal Reserve (“Fed”) Federal Open Market Committee (“FOMC”) meeting scheduled for the end of the month, today’s report is unlikely to inspire any change in interest rates this month. However, the report will almost certainly factor into discussions surrounding a potential change later this year. Here’s what else to know about the June payroll report.
What Sectors Added Jobs In June?
Consistent with prior months, job additions were concentrated in the government and health care sectors. The two combined added 119,000 jobs in June.
The gains in the government sector were particularly robust, with the additions landing 21,000 jobs above the monthly average over the last twelve months. This contrasts with the healthcare sector, which appears to be cooling. The sector gains during the month were 15,000 lower than the twelve-month average.
Social assistance added to its yearly gains, with another 34,000 added in June. Construction, too, bounced back from a flatter reading in May, adding 27,000.
Unlike prior months, there were sectors that logged net declines during the period. Retail trade was one such sector, with 9,000 losses. This was attributable to more discretionary categories, such as home furnishings and electronics, as opposed to necessities and discount retailers, such as warehouse clubs and supercenters, which gained 5,000 jobs.
Professional services also netted a decline of 17,000 during the month. The losses are a notable reversal of the strong gains seen in the previous months.
More narrow pocketed strength in the government and healthcare sectors, as well as moderation or outright declines seen elsewhere, demonstrate the labor market is in a cooling-off period following a stronger than expected start to the first half of the year.
Unemployment And Wage Growth In June
In May, unemployment rose to 4%, its highest level in more than two years. While its rise was somewhat overshadowed by the significant beat in overall job additions, the milestone was one of the first emerging signs of a cooling in the labor market. Based on the details of the report, the rise appeared to be the result of no new work for those returning to the labor market.
Unemployment ticked up to 4.1% in June, slightly higher than expected. The higher reading on unemployment despite moderate payroll gains could be attributed in part to higher openings and a steady quit rate. May’s Job Openings and Labor Turnover Survey (“JOLT”) showed an unexpected rise in openings, as well as a quit rate that held steady for the seventh straight month.
Average hourly earnings rose 0.3% on the month, or 3.9% on an annual basis. This follows a larger than expected YOY rise of 4.1% in May. This month’s reading is notable, given that the last time the annual rise came in below 4% was in June 2021. The decline in wage growth, along with the readings on higher labor supply, are indicative of increasing normalization in the labor economy.
Fed Policy Implications
Minutes of the Fed’s June FOMC meeting, which were released on Wednesday, showed that some policymakers were focused on the possibility that the labor market may cool more rapidly in the months ahead. While the overall minutes suggested no immediate rush to act on interest rates, the documentation did state that the participants would be ready to respond to unexpected economic weakness.
The release of the minutes was preceded in the day prior by commentary from Fed Chairman, Jerome Powell, who highlighted the Fed’s positive cumulative progress on inflation at a European Central Bank (“ECB”) event. He also acknowledged that he needed more confidence that prices will continue to fall further.
Neither event did much to sway the consensus opinion of interest rate observers. The probability of a rate cut, according to CME’s FedWatch Tool, at this month’s FOMC meeting still stands at below 10%, while greater optimism exists for the September meeting. The probability of a rate reduction then stood at about 68% before today's release. This projection changed little, rightfully so, following the release.
The Bottom Line
The monthly payroll figures released over the first half of the year have shown that the labor market has remained much stronger than many had initially expected. Today’s report serves as a break in this trend, with payroll growth lighter than months prior. Additionally, after rising to a more than two-year high in May, the unemployment rate ticked higher still in June.
On a quiet trading day following the U.S. Independence Day holiday, I expected the release to be mostly uneventful in terms of market movement. Based on pre-market trading, this appears to have been the case. Additionally, the Federal Reserve was on track to hold steady on interest rates at their FOMC meeting later this month. While they almost certainly will continue to do so, today’s report will likely be important in laying the groundwork for potential movement in September.
Overall, today’s payroll data shows that following months of stronger than expected activity, there are emerging signs of moderation. Ultimately, a continuing trend of this moderation could potentially pave the way for a rate reduction at the FOMC’s September meeting.