Instant Analysis: Employment report for June

Scott Anderson
Posted by Scott Anderson
Chief Economist

The June jobs report came in on the weak-side of economists’ expectations, revealing a slowdown in job growth to 223K from a downwardly revised 254K jobs in May.  However, it remains consistent with a two-steps forward, one-step back expansion the U.S. economy finds itself in.

Attendees at a conference in front of large glass windows, the sun in the background.Nothing in this report dissuades me that labor market progress continues — just not as fast as we would all like to see as the second quarter comes to a close.

Unemployment rate on track

The highlight, if you can call it that, was the drop in the unemployment rate to 5.3%, keeping the U.S. economy on track for a 5.0% unemployment rate before year-end. But even that happened for a less-than-stellar reason: a sharp drop in the labor force participation rate to 62.6% from 62.9% as the U.S. labor force dropped by 432K in June.

The low light had to be the flat average hourly earnings growth that pushed the year-on-year gain in average hourly earnings back down to 2.0%, where it has been for most of this expansion. No sign yet of renewed nominal wage pressure here.

Gains across many sectors

By sector, we saw moderate job growth in most major sectors of the economy. Business services led the way adding a net (64K) jobs, education and health (50K), trade (49K), leisure and hospitality (22K), and finance (20K). Job growth in goods-producing industries of the economy disappointed in June with manufacturing adding only (4K) and construction (0). Government jobs didn’t add at all to the final jobs tally — also remaining flat on the month. The breadth of these job gains across sectors suggest a sustainable labor market recovery remains in place.

Bottom line, the June jobs report is a bit of a disappointment when compared to other labor market indicators, like initial jobless claims, which suggested the U.S. labor market was gaining momentum in June. It is however consistent with June purchasing manager indexes (PMIs) which have shown more of a mixed economic picture in the final month of the second quarter. (See my U.S. Outlook report from last Friday for a discussion.)

Signs of Q2 weakness visible

The lack of job growth in construction and weak manufacturing job creation shows the goods-producing side of the economy continues to struggle in the second quarter. The U.S. dollar, weakness abroad, energy sector slowdown, and business caution is clearly visible in this payroll report.

The June payroll report was not weak enough, in my opinion, to keep the Fed on hold this year, but it will keep them cautious about the outlook and pace of tightening ahead. I am still looking for one rate hike from the Fed this year, though whether that rate hike comes in September or December is a very close call right now, maybe 50-50. It depends on how the economic indicators and payroll reports look in July and August.

The market’s initial reaction was mixed.  S&P 500 futures indicated opening up 0.3%, the 10-year Treasury yields were trading about 1 basis points lower to 2.41%, and the U.S. dollar was weaker against most major currencies.

NOTE: There will be no U.S. Outlook report tomorrow, July 3, due to the holiday. Happy Fourth!

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