Despite the stronger-than-expected increase in non-farm payrolls last month, the Bureau of Labor Statistics’ June Employment Situation report indicated an overall cooling trend in the U.S. labor market.
Significant downward revisions of 111,000 fewer payrolls in the previous two reports, an unexpected rise in the unemployment rate, and the anticipated slowdown in wage growth are prompting most economists to believe the Federal Reserve may be more confident about announcing an interest rate cut, with September being the nearest option.
Investors seem to share this view, with the probability of a September rate cut rising from 72% to 76% after the jobs report’s release, and the expected cuts increasing from 52 to 55 basis points by the end of the year.
As a result, ETFs tracking interest-rate sensitive industries – such as the iShares MSCI Global Gold Miners ETF RING and the iShares Expanded Tech-Software Sector ETF IGV – outperformed on Friday, up 2.7% and 1% respectively.
June Jobs Report: Key Statistics
| June 2024 | Consensus | May 2024 | |
|---|---|---|---|
| Nonfarm payrolls | 206,000 | 189,000 | 218,000 (downwardly revised from 272,000) |
| goverment payrolls | 70,000 | 25,000 | |
| private payrolls | 136,000 | 193,000 | |
| Unemployment rate | 4.1% | 4% | 4% |
| Average hourly earnings (m/m) | 0.3% | 0.3% | 0.4% |
| Average hourly earnings (y/y) | 3.9% | 3.9% | 4.1% |
Analyst Perspective
Joe Brusuelas, chief economist at RSM US LLP, noted that while demand for labor remains solid, it is slowing. “Fears of a wage spiral which would result in a resurgence of inflation can finally be put to rest,” Brusuelas said, as the three-month average annualized pace of average hourly earnings has eased to 3.5%.
He emphasized that the primary takeaway from the June employment data is its consistency with economic normalization, aligning with other growth and inflation data pointing towards an easing of the Federal Reserve’s restrictive policy rate by September.
He warned that the Fed must avoid talking itself into a corner that could result in falling behind the curve, as it did during the first year of the pandemic. “As the economy cools, the Fed needs to relax its too restrictive policy rate to avoid an unnecessary termination of the business cycle.”
James E. Thorne, chief market strategist at Wellington Altus, observed the substantial net revisions of 111,000 jobs from the prior two months, combined with the modest increase of 206,000 jobs in the most recent period, indicating a volatile and uncertain labor market.
“The government’s significant increase of 70,000 jobs raises questions about the sustainability of such growth,” Thorne said, adding that the impact of extreme levels of government spending should be considered.
He criticized the Federal Reserve’s potential delayed response, noting, “A mere 25 basis points cut will not be sufficient to reverse the downward momentum in the private sector. The Fed is late, and the boom/bust cycle in rates continues.”
Bill Adams, chief economist for Comerica Bank, remarked that the unemployment rate in June rose to its highest since late 2021, despite good monthly job growth offset by downward revisions to March and April.
“The current data suggests the economy is growing, but its pace has cooled considerably over the last year,” Adams said, aligning this with a gradual rise in the unemployment rate.
The economist highlighted that the uptick in the unemployment rate was due to an increase in labor force participation, with prime-age participation reaching its highest since 2002. “The job market looks considerably cooler in the June report than in May, and the unemployment rate at 4.1% is above where the median Fed policymaker projected it at year-end,” he explained.
Adams suggested that while the labor market isn't soft enough to justify an interest rate cut at this month's meeting, the cooling trend is evident, and a rate cut could come in September if inflation holds.
Quincy Krosby, chief global strategist for LPL Financial, highlighted the market’s immediate reaction to the 4.1% unemployment rate, noting that both the policy-sensitive 2-year and 10-year Treasury yields edged lower.
She raised increasing evidence that the Fed will need to initiate a rate easing cycle to support its maximum employment mandate. “The cooling in the labor market, despite the higher than consensus estimate for the headline payroll print, portends a broader economic downturn,” Krosby said.
She warned that the consumer’s growing concern about job security could lead to a frigid summer for the economy, especially with the latest ISM Manufacturing and Service Sector PMI data indicating a broader economic contraction.
“Today’s report should have Fed officials troubled that the desired cooling in the economy could transition into a frigid summer,” she concluded.
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