In a mixed signal for the U.S. economy, the Labor Department reported Friday that nonfarm payrolls increased by 206,000 in June, surpassing the Dow Jones forecast of 200,000 but falling short of May's downwardly revised gain of 218,000. At the same time, the unemployment rate unexpectedly climbed to 4.1%, its highest level since October 2021, complicating the Federal Reserve's decision-making on monetary policy.
"The job market is bending without yet breaking, which boosts the argument for rate cuts," said David Russell, global head of market strategy at TradeStation. "Things are not too hot and not too cold. Goldilocks is here and September is in play."
Despite the increase in job creation, the rise in the unemployment rate reflects a labor market that is not entirely stable. The labor force participation rate, which measures the proportion of working-age people who are either employed or actively seeking work, edged up to 62.6%, a 0.1 percentage point increase from the previous month.
June's job gains were significantly bolstered by a 70,000 surge in government jobs. The healthcare sector also performed well, adding 49,000 jobs, while social assistance and construction saw increases of 34,000 and 27,000 jobs, respectively. However, several sectors experienced declines, including professional and business services, which shed 17,000 jobs, and retail, which lost 9,000 jobs.
Average hourly earnings rose by 0.3% for the month and 3.9% year-over-year, both figures aligning with market expectations. The average workweek remained steady at 34.3 hours.
In addition to the gains in June, the Bureau of Labor Statistics revised down job creation figures for the previous two months. May's job gain was adjusted to 218,000 from an initial estimate of 272,000, and April's figures were revised down to 108,000, a reduction of 57,000.
Long-term unemployment saw a notable increase in June, rising by 166,000 to 1.5 million, compared to 1.1 million a year ago. The share of long-term unemployed as a percentage of the total unemployed population also rose, from 18.8% a year ago to 22.2%.
The unemployment rate for Black workers climbed to 6.3%, the highest since March, while the rate for Asians jumped to 4.1%, its highest since August 2021. These figures add another layer of complexity to the Federal Reserve's assessment of the labor market's health.
Federal Reserve officials are closely watching these labor market developments as they contemplate their next moves on monetary policy. At their most recent meeting, policymakers expressed the need to see more progress on inflation before considering interest rate cuts. However, the combination of a strong labor market and rising unemployment presents a nuanced picture.
"There are no cracks here that would cause the Fed to rush to the rescue with rate cuts, and the labor market is in line with a continuation of slowing inflation," said Robert Frick, corporate economist at Navy Federal Credit Union. "That should lead to one or two cuts this year."
Despite market expectations for rate cuts by the end of 2024, Fed officials have signaled a more cautious approach. According to minutes from the June meeting, policymakers indicated they need to see "additional favorable data" before moving forward with rate reductions.
Economic growth also appears to be slowing. Gross domestic product (GDP) increased by just 1.4% on an annualized basis in the first quarter and is on track to grow at a similar 1.5% pace in the second quarter, according to the Atlanta Fed.
Purchasing manager surveys have shown contraction in hiring for both the manufacturing and services sectors, further suggesting that the economy is cooling. These factors will likely weigh heavily on the Federal Reserve's decisions in the coming months.
The current federal funds rate target range of 5.25% to 5.50% is the highest in 23 years and has remained unchanged for about a year. As the Fed weighs the mixed signals from the labor market and broader economy, the timing and extent of any future rate cuts remain uncertain.
