June report shows weaker labor market trends

Fed likely to weigh labor market more for rate cuts

by Faruk Imamovic
June report shows weaker labor market trends
© Getty Images/Spencer Platt

June's employment report showed a further softening in labor market trends.

While the headline payrolls number was solid it was accompanied by sizeable downward revisions. More importantly, the composition of gains has become less favorable. The private sector ex health care trend is weakening again after having shown a resurgence earlier in the year.

The unemployment rate ticked up for the third consecutive month and now exceeds the median participant estimate at the Fed's June meeting.

Wage growth appears to be in a sweet spot. Nominal wages continue to moderate YoY and are now only slightly above pre-pandemic levels. Even with this trend, however, real wage growth appears to have been solidly positive for June and should support near-term real consumer spending.

The report is likely to result in the FOMC placing greater weight on the labor market when considering the timing of rate cuts.

While for now our base case for a first cut remains December, it has become increasingly likely that one may occur earlier than this, with a reduction at the September meeting a strong possibility.

For a September cut to take place two conditions likely need to be met:

  1. The labor market will need to show continued softness
  2. Inflation data will need to be supportive of disinflation and confirm that the 1Q resurgence is in the rearview mirror.

Payrolls composition has become less favorable

Nonfarm payrolls growth was a solid +206K in June, but was offset by a two-month down revision of -111K.

The composition of gains has become less favorable over the past three months. Private sector gains have averaged just +145K with more than 60% of these coming from the health care & social assistance sector.

The deceleration in private ex-health care has been substantial. The three-month average here has fallen to +58K, the weakest since 2020 and less than half the pace of gains that occurred during 1Q24.

Unemployment rises for the third straight month

Household employment gained a subdued +116K. In a silver lining, the adjusted series showed a more substantial gain. Both measures, however, continue to trend at a much slower pace than headline NFP.

The softness in household employment contributed to the unemployment rate rising for the third straight month, reaching 4.1%. On a three-month average basis it is now up +0.5 ppts from the trough reached in early 2023.

Detail in previous months has suggested the rise in unemployment has come from a lack of hiring. From its trough, the rise in unemployment has been most significant amongst labor force entrants and re-entrants and amongst younger workers (aged 16-24).

In June there was evidence of this broadening. The unemployment rate for younger workers actually declined. The pick-up resulted from higher unemployment amongst those 25 years and older with higher education levels.

Leading indicators remain mixed

Aside from the continued rise in unemployment, weakness was most apparent in:

  1.  A sharp decline in temp help employment
  2.  A further decline in job openings as a share of unemployed

Elsewhere, however, there was resiliency:

  1. Manufacturing and construction employment reached a new cycle high
  2. The residential construction employment share continued to trend higher
  3. The three-month diffusion index was steady