LIVE MARKETS-June jobs jump on government hiring; waning participation drags unemployment lower

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JUNE JOBS JUMP ON GOVERNMENT HIRING; WANING PARTICIPATION DRAGS UNEMPLOYMENT LOWER

The June employment report released on Thursday brandished a double-edged sword; it was stronger than expected, which suggests the U.S. economy is robust and chugging along. On the other hand, it tossed a wet blanket over hopes for a July rate cut from the Federal Reserve.

The U.S. economy added 147,000 jobs in June, USNFAR=ECI, a slight, unexpected increase from May's upwardly revised 144,000 gain and 37,000 more than analysts expected.

This marks the sixth upside surprise in the past 12 months, and the ninth reading below the 200,000 mark over the same time period.

Digging beneath the headline, the services sector was responsible for 91.9% of the 74,000 private sector job adds, while the manufacturing sector shed 7,000 workers, steeper than the predicted 5,000 loss. Government payrolls, on the other hand, increased by 73,000, an unexpected surge in light of the mass DOGE-related firings of recent months.

All told, however, the report appears to have thrown cold water on hopes for a July rate cut from the Fed.

"(This report) takes us back to a September rate cut," Peter Cardillo, chief market economist at Spartan Capital Securities tells Reuters. "On the other hand, if inflation should pop up due to the tariffs, then they would probably go even out further and wait for December."

"Things staying the way they are now, I think we’ll get a rate cut in September," Cardillo adds. "But I would certainly rule out July."

The report also gave markets their first glimpse at June inflation, showing average hourly wages rose by 0.2% on a monthly basis, cutting May's 0.4% rate in half and cooler than the 0.3% consensus.

Year-over-year, wages increased 3.7%, or 0.2 percentage points below economist forecasts.

"Reliable indicators of labor market slack such as the JOLTS quit rate continue to point to a further slowdown in underlying wage growth over the next few quarters," writes Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "With the labor market apparently loosening further in response to the tariff shock, the notion that workers have enough bargaining power to push for higher wages to offset the hit to their real incomes from any tariff-induced price rises looks increasingly fanciful."

The jobless rate USUNR=ECI defied expectations by edging down to 4.1%, while the labor market participation rate continued to deteriorate, shaving off 10 basis points to 62.3%, the lowest reading since December 2022.

The two go hand-in-hand.

When Americans leave the labor pool they are no longer considered part of the workforce and are not counted among the unemployed. So a dip in participation rate often corresponds with a dip in unemployment.

"The risk going forward is that slower labor force growth keeps the unemployment rate low even as the number of unemployed rises," says Nancy Vanden Houten, lead U.S. economist at Oxford Economics.

The average unemployment duration ticked down to 21.5 weeks from May's 22.6 weeks, but a pullback in the amount of time it takes laid off workers to find new gigs could help reverse souring labor market confidence:

A separate report from the Labor Department shows that 233,000 U.S. workers joined the queue outside the unemployment office last week USJOB=ECI, an unexpected 1.7% weekly decrease and undershooting consensus by 7,000.

The underlying trend, as expressed by the four-week moving average of initial claims, now has a downward bias, suggesting layoffs are on the wane.

However, ongoing jobless claims USJOBN=ECI, reported on a one-week lag, held steady at 1.964 million, or 8,000 more than analysts expected. This contradicts the shortening average unemployment duration of the employment report and supports recent consumer survey data suggesting laid off workers are finding it increasingly difficult to find a replacement gig.

(Stephen Culp)

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