June Jobs Report a Potential Bearish Signal for the Economy

The US economy added 206,000 jobs in June, according to the latest report from the Bureau of Labor Statistics—an above-forecast rise. However, substantial revisions to May and April’s job gains showed a softer trend for hiring growth and put a September rate cut from the Federal Reserve squarely on the table.

The report revised down previous estimates for new job creation in May and April. According to FactSet’s consensus estimate, the economy had been expected to add 190,000 jobs in June, from an originally reported 272,000 in May. In addition, April’s increase in hiring was revised to 108,000 from 165,000. With the revisions, the June employment report showed a slowing of the three-month moving average for hiring. The unemployment rate, which had been forecast to stay at 4.0% from May to June, instead ticked up to 4.1%.

“Today’s jobs report is a bearish signal for the economy,” says Preston Caldwell, Morningstar’s chief US economist. “Similar job data in the next two months should cement the case for a September cut in the federal-funds rate.”

June Jobs Report Shows Still-Decent but Slowing Hiring

While the overall increase in hiring of 206,000 reported for June is “decent” growth, Caldwell notes that nonfarm payroll employment growth grew at a 1.4% annualized rate in the three months ending in June, down from 2.1% in the three months ending in April. “That’s the slowest rate since January 2021,” he says. April and May’s gains were revised down by a combined 111,000 jobs.

In the wake of the report, expectations rose in the bond market that the Fed would begin cutting interest rates in September. The central bank is now given roughly 72% odds of cutting its funds rate target by a quarter of a percentage point from the current range of 5.25%-5.50%, according to the CME FedWatch Tool. That’s up from 68% on Wednesday and 57% a month ago.

June Jobs Report Key Stats

• Total nonfarm payrolls rose by 206,000 versus a downward-revised 218,000 in May.
• The unemployment rate rose to 4.1% from 4.0% in May.
• Average hourly wages increased by 0.3% to $35 after rising 0.4% in May.

The BLS reported that the rise in new jobs during June was led by government, healthcare, social assistance, and construction. However, Caldwell says the cooling in hiring over the last three months was seen mainly in government, which slowed to a 1.6% pace from 3.4%, and construction and real estate, which slowed to 1.4% from 3.5%. “It’s not surprising that construction job growth is slowing, as the strain of high interest rates is causing a renewed slowdown in housing and also beginning to weigh on nonresidential construction,” he says.

At a higher level within the report, the slowing growth in payrolls hiring—which is sourced from a survey of businesses—presents “a drift closer to bearish picture by the BLS’ separate survey of households,” Caldwell says. “A large gap between the two surveys has developed over the past year. The household survey shows employment growth of just 0.2% year over year versus 1.7% growth of nonfarm payrolls.”

He continues: “Economists typically regard the establishment survey’s nonfarm payrolls as providing a higher quality signal of actual employment growth. And we have good reason to think that the household survey is underestimating immigration, contributing to the underperformance versus payrolls.”

Worrying Jump In Unemployment

At the same time, Caldwell points to the increase in the unemployment rate to 4.1% in June—up from 3.6% a year ago. “That’s a worrying increase,” he says

Average hourly wages rose by 10 cents in June, or 0.3%, to $35. Over the past 12 months, average hourly earnings have risen by 3.9%.

“Today’s data also shows wage growth falling to 4% year over year” with a three-month moving average, Caldwell says. “That’s the lowest since mid-2021. That’s getting closer to the 3.5% wage growth needed to generate stable inflation. It provides further evidence that labor markets are cooling.”

The average workweek for all employees on private nonfarm payrolls was unchanged at 34.3 hours in June. For manufacturing employees, the average workweek grew to 40.3 hours in June, and overtime was unchanged at 2.9 hours. For production and nonsupervisory employees, the average workweek increased to 34.1 hours from 33.6 the prior month.

“Average weekly hours worked was about flat in the past three months,” Caldwell says. “That’s after having fallen 0.6% in the year ending in March 2024. Average hours worked is now well below prepandemic levels. It may be that firms are switching to curbing employment growth, now that room to cut hours has run out.”

June Jobs Report Could Pave the Way for a September Rate Cut

The report adds weight to the evidence suggesting the US economy is finally starting to moderate. “With today’s news, we now have a full panoply of data pointing to a deceleration in economic growth,” Caldwell says. He notes that the Atlanta Fed’s GDPNow projects second-quarter GDP growth at 1.5%, “a tepid follow-up to the 1.4% growth in the first quarter.”

This slowing growth should allow the Fed to start cutting rates in September. “With inflation coming under control, good risk management would call for the Fed to cut interest rates prophylactically,” he says. “Given the noise inherent to the data, it’s not definitive that economic growth is slowing. But the probability of a slowdown is high enough to call for cutting rates now, before it gets too late. We expect the Fed to pave the way for a September cut.”