US economy added jobs at a slower pace than expected in June

US economy added jobs at a slower pace than expected in June

U.S. Employers slowed hiring in June, adding 57,000 jobs, a figure that fell significantly short of the 110,000 jobs estimated by economists polled by LSEG. The data, released Thursday by the Bureau of Labor Statistics, suggests a cautious economic outlook among businesses amid elevated inflation and uncertainty regarding the economic impact of the Iran war.

The report also included downward revisions for the previous two months. April's gain was revised from 179,000 to 148,000, and May's gain was lowered from 172,000 to 129,000. Combined, employment for April and May was 74,000 jobs lower than previously reported.

Despite the slower hiring pace, the unemployment rate dipped to 4.2%, down from 4.3% in May. However, the Labor Department noted this decline occurred largely because many jobless individuals stopped looking for work and were no longer counted as unemployed. This shift was mirrored in the labor force participation rate, which decreased by 0.3 percentage points to 61.5% — the lowest level in more than five years. Participation for prime-age workers between 25 and 54 also dropped to 83.3%, matching the lowest level since 2023.

Sector Breakdown and Market Divergence

Growth was uneven across different industries. Healthcare and social assistance remained a primary driver, adding nearly 47,000 positions according to some data, though other figures cited a gain of 21,500 to 22,000 jobs. This represents a slower pace than the average monthly gain of 38,000 seen over the last 12 months. Hospitals specifically contributed 9,000 to 9,200 jobs.

In contrast, the leisure and hospitality sector saw a sharp decline of 61,000 jobs. The BLS attributed this to weaker than usual seasonal hiring. The loss was unexpected for analysts who believed the FIFA World Cup, hosted across multiple U.S. Cities, would trigger temporary job gains. Retailers also shed 7,500 jobs.

Chad Moutray, chief economist at the National Restaurant Association, said member companies see consumers pulling back on eating out, particularly those in middle- and lower-income households. He described this as a K-shaped economy where wealthier households continue to spend while others struggle.

Other sector movements included:

• Professional and Business Services: Added 36,000 jobs.
• Construction: Added 11,000 jobs.
• Manufacturing: Added 3,000 jobs, matching economist estimates.
• Government: Grew by 8,000 jobs.
• Information: Continued to decline, marking the 17th drop in 18 months as some Big Tech firms like Microsoft Corp. And Meta Platforms Inc. Reduce headcount.

The "Low-Hire, Low-Fire" Dynamic

Economists describe the current state as a low-hire, low-fire or no hire, no fire rut. While layoffs remain low and employed workers enjoy security, those outside the workforce struggle to find openings. Nicole Bachaud, a labor economist at ZipRecruiter, noted a mismatch where companies seek senior, experienced workers while job hunters gravitate toward entry-level roles.

Jeffrey Roach, chief economist at LPL, observed that while firms are still adding to payrolls, hours worked remain below pre-pandemic levels. He called the trend of individuals dropping out of the job market altogether concerning.

The long-term unemployed — those jobless for 27 weeks or more, stood at 1.9 million in June. This group represents 27.3% of all unemployed people and is up 286,000 over the year. Additionally, 4.7 million people remained employed part-time for economic reasons.

Impact on Federal Reserve and Markets

The softer payroll growth may reduce pressure on the Federal Reserve to tighten monetary policy. Average hourly earnings rose 3.5% from a year earlier, suggesting wage gains are not accelerating enough to worsen inflation, which remains above the central bank's 2% target.

The CME FedWatch tool indicates a 41.8% probability that the Fed will hike the federal funds rate by 25-basis-points from its current range of 3.5% to 3.75%, compared to a 21.7% chance of rates remaining steady. Fed chair Kevin Warsh recently reiterated his goal to push inflation back to the 2% target but did not comment on whether rates would rise at the next meeting later this month.

Stock markets reacted positively to the report. The S&P 500 index rose about 0.7%, the Dow Jones Industrial Average increased about 0.6%, and the Nasdaq Composite rose slightly more than 0.7% during morning trading. Eric Winograd, chief U.S. Economist at AB Global, stated the data hit a sweet spot by remaining strong enough to avoid growth worries but soft enough to lower the likelihood of a rate hike.

Looking ahead, economists suggest that the resumption of US-Iran peace negotiations and tumbling oil prices may improve consumer sentiment and encourage employers to increase hiring in the coming months.