US jobs growth slows

June payroll figures came in meaningfully lower than expected, posting an increase of just 57,000, a notable decline from the 164,000 monthly average over the prior three months. The downward revision of the prior two months’ gains further suggested a slowdown in momentum. While these figures appear soft at first glance, they are not indicative of a deteriorating labor market. Slower hiring was offset by benign layoffs, and a shrinking labor force pushed the unemployment rate lower, underscoring a labor market that remains balanced. Neither triggers concerns about a slowdown or pressures the Fed to hike rates.

Report details

• Total non-farm payrolls increased by 57,000 in June, below the expected gain of 113,000. Additionally, April and May payroll figures were revised lower, reducing job gains by 74,000 over the two months. While the slowdown in hiring momentum—following three exceptionally strong months—may appear disappointing at first glance, broader trends remain constructive. The three-month moving average of payroll growth sits at 111,000, meaningfully above the Fed’s estimate of payroll breakeven (the number of jobs needed to keep employment conditions steady) and well above the 73,000 average at the start of the year. Taken together, these trends suggest the labor market remains steady despite the headline miss.
• Beneath the softer-than-expected reading, job growth in June was fairly broad-based, with 6 of 11 major sectors adding jobs. Healthcare was the clear standout, adding 47,000 jobs and significantly outpacing other industries. Cyclical sectors such as Construction and Manufacturing saw more modest job gains, though these gains are still indicative of an improvement in economic activity supported by the strong capex cycle. Encouragingly, Professional & Business services also posted solid gains, marking six consecutive months of gains after persistent declines last year.
• Job losses were concentrated in Leisure & Hospitality (particularly restaurants and hotels) and Retail Trade. The weakness was surprising, given expectations that World Cup-related tourism would boost hiring. The information sector also shed jobs for the 17^th time in the last 18 months, leaving employment about 10% below its November 2022 peak. While the sector remains at the forefront of AI-related displacement, its relatively small share of total payrolls suggests broader labor-market impacts remain limited for now.
• The unemployment rate declined to 4.2%, while the labor force participation rate dropped significantly to 61.5%, the lowest level since March 2021. Notably, the decline was largely driven by the drop in the foreign-born workforce, likely an after-effect of the administration’s stricter immigration stance. Simultaneously, demographic shifts associated with an aging population are constraining labor supply. Taken together, these forces reduce the breakeven level of payroll growth, helping explain why a payroll gain in the mid-50,000 range, historically considered a weak reading, was enough to push the unemployment rate lower.
• Wages grew 3.5% from a year ago, as expected, with the three-month annualized rate continuing to decline steadily. As a result, wage pressures remain subdued despite the recent energy shock, helping keep broader inflation contained. That said, continued strength in the labor market alongside a shrinking labor force increases the risk of reigniting wage pressures. 

Policy outlook

While this month’s jobs report fell short of expectations, it still points to a labor market that remains on solid footing. Both today’s reading and the overall pace of job creation in recent months are meaningfully above the Fed’s estimate of breakeven employment growth, which is close to zero. Additionally, job gains in cyclical industries, specifically Manufacturing and Construction, while modest, suggest economic activity is firming up, supported by the positive impulse from the ongoing AI-driven capex cycle. While AI has been cited as a reason for job cuts, layoffs remain near historically low levels.

Thus far, labor market strength is not being accompanied by rising wage pressures, helping keep overall inflation contained. For the Fed, whose dual mandate consists of maximum employment and price stability, today’s report may represent a comfortable balance, reducing the need to tighten policy immediately. That said, diminishing labor market slack raises the risk that increased labor demand could reignite wage pressures, particularly amid a broader inflationary impulse stemming from the conflict and AI-related supply chain disruptions.

For now, a wage-price spiral isn’t yet evident, and we continue to expect the Fed to hold rates steady through year-end. However, any signs of meaningful labor market tightening and accelerating wage growth could strengthen the case for Fed hikes this year.

Principal Asset Management