June payrolls miss by half as labor force shrinks to 5-year low

The US added 57,000 jobs in June, roughly half the 110,000 economists expected, as the labor force participation rate fell to 61.5 percent — its lowest in more than five years.

"The headline miss looks alarming, but the real story is a labor force that shrank by 720,000 people," said Ellen Hazen, chief market strategist at F.L.Putnam Investment Management. "The question is whether that reflects weak demand for workers or a structural shortage of supply."

The unemployment rate fell to 4.2 percent from 4.3 percent, entirely because the labor force denominator contracted. Private payrolls rose just 57,000, with leisure and hospitality swinging from gains to a loss of 61,000 — the largest monthly decline in that sector since December 2020. Manufacturing added no net jobs in the second quarter. The prior two months were revised down by a combined 74,000.

The report reduces pressure on the Federal Reserve to raise rates at its July meeting, though Chairman Kevin Warsh has signaled inflation remains the primary concern. Overnight-indexed swap markets pushed out the expected timing of the first rate hike by roughly one month after the release.

The weakness was concentrated in rate-sensitive sectors. Leisure and hospitality, which had been expected to benefit from World Cup-related tourism, shed 61,000 positions. Healthcare and social assistance continued to add jobs, extending its run as the primary engine of private-sector hiring. Average hourly earnings rose 3.5 percent from a year earlier, a pace consistent with the Fed's inflation target but unlikely to accelerate given the softening in aggregate hours worked.

The drop in labor force participation — from 61.8 percent to 61.5 percent — was broad-based. Participation among prime-age workers aged 25 to 54 declined, and the foreign-born labor force also contracted. The last time the participation rate stood at 61.5 percent was in early 2021, when pandemic-related disruptions were still suppressing labor supply. That comparison underscores the structural nature of the current decline: retirements, reduced immigration flows, and a lower attachment to the workforce among younger cohorts have all contributed.

Market reaction was muted but directionally dovish. The S&P 500 futures rose 0.17 percent, while the yield on the 10-year Treasury note slipped 0.4 basis point to 4.471 percent. The dollar index fell 0.66 percent to 100.74, its lowest level in weeks. "It's the best number we could hope for," said Florian Ielpo, head of macro at Lombard Odier Investment Managers. "The job market is doing fine, but it's not hot enough to accelerate inflation pressures."

The report follows three consecutive months of above-consensus payroll gains, which had fueled speculation that the Fed might need to resume tightening. The June data, combined with the downward revisions, brings the three-month average to roughly 81,000 — below the 100,000-to-120,000 range that economists estimate is needed to keep the unemployment rate stable. "Warsh can wipe his brow," said Brian Jacobsen, chief economist at Annex Wealth Management. "The labor market isn't overheating."

Nobel laureate Paul Krugman described the labor market as "soft" in a Bloomberg Television interview, while expressing concern about Warsh's monetary policy stance. The Fed chair said at the ECB Forum on Wednesday that inflation remains elevated, though oil prices have retreated from recent highs. The next FOMC meeting is scheduled for July 28-29, and markets now assign a lower probability of a rate hike at that gathering.

This article is for informational purposes only and does not constitute investment advice.