U.S. job growth slowed significantly in June, with payroll gains well below expectations and revisions to the prior two months’ data pointing to a cooling labor market, according to the Labor Department’s monthly employment report released Thursday. The unemployment rate fell to 4.2%, down from 4.3% in May, but this decline coincided with a sharp drop in labor force participation to 61.5%, the lowest level in over five years. Approximately 720,000 individuals exited the labor force last month, contributing to the lower unemployment figure.
Nonfarm payrolls expanded by 57,000 jobs in June, a notable slowdown from the initially reported gain of 172,000 jobs in May. The May increase was revised downward to 129,000, and April’s payrolls were also adjusted lower by 31,000, bringing that month’s total to 148,000. Economists had forecast a payroll gain of around 110,000 for June, with estimates ranging broadly from 25,000 to 200,000. This moderation aligns with various labor market surveys that have suggested a softer employment outlook in recent months.
Some analysts have speculated that the deceleration in payroll growth may be a delayed response to the ongoing war in the Middle East, which has introduced uncertainties into the broader economy. Christopher Rupkey, chief economist at FWD-BONDS, commented on the volatility of recent labor market data, noting the shift from a stronger jobs picture just weeks ago to a marked slowdown, possibly influenced by geopolitical tensions.
Despite the softer job growth, layoffs remain historically low. Employers have shown reluctance to reduce their workforce amid lingering labor shortages following the COVID-19 pandemic. Sectors like professional and business services led job gains with 36,000 new positions, followed by increases of 25,000 in social assistance and 22,000 in healthcare, although healthcare additions were below the average monthly gain over the past year. In contrast, leisure and hospitality employment fell by 61,000 jobs, despite expectations that the FIFA World Cup would spur hiring in that sector.
The weakening payroll data prompted a reassessment of Federal Reserve monetary policy expectations. Market reactions after the report weighed heavily against the likelihood of an interest rate hike at the Fed’s upcoming July meeting. Futures markets priced in less than a 20% probability of a July increase, down from about 75% before the employment figures were released. Nevertheless, investors still foresee additional tightening later in the year, with a roughly 60% chance of a rate hike in September.
The labor force participation rate’s decline and the recent reduction in immigration have lowered the estimated number of monthly jobs needed to maintain stable unemployment. Economists suggest that between zero and 50,000 new jobs per month are now sufficient to keep pace with working-age population growth, reflecting demographic and policy shifts affecting labor supply.
The report was issued a day earlier than usual due to the U.S. Independence Day holiday, commemorating the nation’s 250th anniversary. Overall, the data underscores signs of a slowing labor market amid persistent uncertainties in the global and domestic economic environment.