June employment: From sizzle to fizzle

Summary

Nonfarm payrolls gains were solid in June, rising 206K, but the underlying details of today's employment report clearly signal that the U.S. labor market is softening. June job growth topped consensus forecasts by 16K, but this was more than offset by 111K of downward revisions to job growth in April and May. The composition of job growth continues to be led by sectors that are less cyclically sensitive. Nearly 75% of June's employment growth could be attributed to government (+70K) and health care & social assistance (+82K). The separate household survey also showed a cooling labor market. The unemployment rate once again ticked higher to 4.1%, above both its post-pandemic low (3.4% in April 2023) and its pre-pandemic average (3.7% in 2019).

The cooling in the labor market extends beyond just the data released in the monthly employment report. The number of job openings per unemployed person is back to its pre-pandemic level, while the share of workers quitting their jobs and small business hiring plans are below pre-pandemic averages. Wage growth remains a bit elevated compared to 2019, but we believe this indicator will continue to slow with a lag. The slower inflation data over the past couple months, when paired with the softening labor market, bolster the case for the FOMC to begin reducing the fed funds rate as early as its September 18 meeting. Our forecast remains for two 25 bps rate cuts this year at the September and December FOMC meetings.

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