June employment: Live to fight another day

Summary

The headline employment data for June generally were encouraging. Nonfarm payrolls increased by 147K last month, clearing a relatively low consensus forecast of 106K. Revisions to job growth in May and April were modestly positive. The unemployment rate fell by one tenth to 4.1%, and in a separately released report, initial and continuing jobless claims were roughly unchanged in the most recent week for which we have data.

But, underneath the surface, the details were less encouraging and generally were consistent with a cooling labor market. The breadth of hiring was once again quite narrow. An unusually large jump in state and local government education employment (+64K) may be a seasonal quirk related to the end of the school year in June. Health care & social assistance and leisure & hospitality once again posted solid gains, but outside these sectors hiring in the rest of the economy was relatively flat. Furthermore, the decline in the unemployment rate was partially driven by workers leaving the labor force. The labor force participation rate fell to 62.3%, its lowest reading since December 2022.

Today's employment data make a rate cut at the July FOMC meeting quite unlikely, in our view. But, we think the ongoing cooling in the labor market should keep the Fed on track to start cutting rates at its September meeting. The rate path will be highly dependent on the path of inflation over the summer months as the FOMC attempts to discern the impact that tariffs are having on price growth. The June CPI report to be released on July 15 will be a critical piece of data on this front.

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