Why the June Jobs Report Isn’t as Strong as It Looks

Key Takeaways

• The US economy added 147,000 jobs in June—a healthy number that may mask weaker trends.
• The largest gains came from state and local governments.
• Market watchers still expect the Fed to hold rates steady at its July meeting.

The June jobs report showed that the US economy continued to add jobs at a healthy clip, even against the backdrop of tariffs, government spending cuts, and slowing economic growth. But looking at the details, analysts say there’s evidence that the labor market is cooling.

The economy added 147,000 jobs last month, according to data released Thursday by the Bureau of Labor Statistics. That was roughly on par with the 144,000 added in May and far higher than economist forecasts of 115,000 for June. The unemployment rate fell to 4.1% from 4.2% in May.

The bulk of the gains in June came from state government and healthcare, according to the BLS, while the federal government continued to lose jobs.

Signs of a Cooling Labor Market

Despite the healthy headline number in June, analysts say the underlying data was less encouraging. “It could be argued that today’s report is not as positive as the headline suggests, given that nearly half of June’s job additions came from government, which is not necessarily a good indication of economic strength,” says Morningstar Wealth chief multi-asset strategist Dominic Pappalardo. He points to slowing growth in the private sector in June.

“The hiring dynamic in the country has quietly gotten a little bit softer now,” adds Rick Rieder, BlackRock’s chief investment officer of global fixed income, who thinks the spike in state and local government hiring may not be a durable trend. He says that while the data doesn’t point to a concerning downtrend, it does suggest “companies are hiring fewer people these days.”

Economists from Wells Fargo described Thursday’s report as consistent with a cooling labor market. “The breadth of hiring was narrow and the decline in the unemployment rate was partially driven by workers leaving the labor force,” they wrote in a research note.

June Jobs Report Key Stats

• Total nonfarm payrolls rose by 147,000 after rising by 144,000 in May.
• The unemployment rate moved little at 4.1% in June from 4.2% in May.
• In June, average hourly wages rose by 8 cents, or 0.2%, to $36.30.
• The average workweek for all employees on private nonfarm payrolls edged down by 0.1 hour to 34.2 hours in June. For manufacturing employees, the average workweek was unchanged at 40.1 hours in June, and overtime was unchanged at 2.9 hours.

When Will the Fed Cut Rates?

Analysts don’t expect the report to alter the Federal Reserve’s monetary policy. “There is nothing to force the Fed off the sidelines at the July meeting,” said BMO Capital Markets chief US economist Scott Anderson in a note to clients.

The Fed has kept rates at their current range of 4.25%-4.50% since last December, and it is widely expected to continue holding steady at its upcoming meeting. Fed officials have been consistent in their messaging that they are not in a rush to cut while economic data still looks solid, especially since inflation remains above their 2% target as measured by the Personal Consumption Expenditures index.

Pappalardo argues that the strong overall jobs number for June might complicate the Fed’s decision-making. “Today’s release does little to help the Fed alleviate their current conundrum of likely wanting to lower rates amid concerns around slowing economic activity, but being hesitant to do so amid risks of persistent or even increasing inflation,” he says. “A strong employment picture does nothing to alleviate the Fed’s inflation-related concerns and will likely prevent them from cutting rates sooner-than-expected as discussed above.”

Bond futures markets see 67% odds that the first rate cut comes in September, according to the CME FedWatch Tool. That’s up from 55% odds a month ago.