WASHINGTON, July 2 (Reuters) – U.S. job growth slowed sharply in June and payroll gains for the prior two months were revised lower, pointing to a cooling labor market and prompting financial markets to dial back expectations for a near-term interest rate hike from the Federal Reserve.
While the Labor Department’s closely watched employment report on Thursday showed the unemployment rate dropped to 4.2% last month from 4.3% in May, that was due to 720,000 people leaving the labor force, which pushed down the participation rate to the lowest level in more than five years.
Some economists said the bigger-than-expected slowdown in job growth was likely a delayed response to the Middle East conflict, which has raised gasoline prices and boosted inflation. They pointed to a 61,000 drop in leisure and hospitality payrolls, the largest since the pandemic, which the government said reflected “weaker than usual seasonal hiring.”
Though gasoline prices have dropped below $4.00 a gallon amid a fragile ceasefire between the U.S. and Iran, prices at the pump remain above the national average retail price of $2.98 before the war started at the end of February. Economists said Americans could be eating out less as a result.
They generally viewed the labor market as remaining in a “low hire, low fire” state, and expected the U.S. central bank to stay focused on inflation.
“I would expect that most policymakers would continue to regard the labor market as stable and neither too hot nor too cold,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. “There was a substantial knee-jerk reaction in financial markets, including scaling back the odds of rate hikes this year. I view the latter as an improper response.”
Nonfarm payrolls increased by 57,000 jobs last month, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls advancing 110,000, with estimates ranging from as low as 25,000 to as high as 200,000.
The establishment survey also showed the economy created 74,000 fewer jobs in April and May than previously reported.
Still, employment gains averaged 111,000 per month in the second quarter, far more than the 34,000 during the same period last year. The report was released a day early due to Friday’s public holiday marking the United States’ 250th anniversary of independence on Saturday.
The moderation and downward revisions brought payrolls into alignment with other labor market surveys, including small business hiring plans, which have offered a less-robust picture of the jobs market. Financial markets expected the U.S. central bank to keep monetary policy unchanged this month, and lowered the odds of a rate hike in September to about 60% from roughly 75% before the employment report.
The Fed last month left its benchmark overnight interest rate in the 3.50%-3.75% range, but updated quarterly projections showed policymakers expected to raise borrowing costs this year.
Stocks on Wall Street were trading higher. The dollar eased against a basket of currencies. U.S. Treasury yields fell.
Low Layoffs Underpinning Labor Market
A historically low level of layoffs remains the key driver of payroll gains, with hiring tepid, attributed to what economists said were never-ending headwinds first from tariffs last year and recently the U.S.-led war with Iran.
“It is hard to keep track of which way the pendulum is swinging in the labor market as the stronger jobs picture just a month ago has suddenly weakened perhaps with the delayed reaction to the war in the Middle East,” said Christopher Rupkey, chief economist at FWDBONDS.
Professional and business services led job gains last month, with 36,000 positions added. Social assistance employment increased 25,000, while healthcare payrolls rose 22,000, below the monthly average gain of 38,000 over the past year.
Leisure and hospitality employment dropped 61,000, the most since December 2020. Payrolls at restaurants and bars tumbled 32,900, while those at hotels and motels fell 21,700 despite expectations the FIFA World Cup tournament, jointly hosted by the U.S., Canada and Mexico, would boost hiring.
“June is usually a strong month for travel, restaurants, hotels, and entertainment,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University. “Some of this may be payback after earlier strength, but it also raises a broader concern; lower-income consumers may be pulling back, and service employers may be less confident about summer demand.”
Construction employment increased 11,000, while manufacturing payrolls rose 3,000. The retail sector shed 7,500 jobs and employment in the information industry dropped 9,000. The financial sector added no jobs. Government payrolls increased 8,000 after surging 32,000 in May.
The share of industries reporting job growth slipped to 54.4% from 56.0% in May. Despite the cooling in employment gains, wages maintained their noninflationary pace of growth. Average hourly earnings increased 3.5% in the 12 months through June after rising 3.4% in May. Wages are trailing inflation, with the Consumer Price Index increasing 4.2% year-on-year in May, which economists warned will eventually hamper spending.
The drop in the unemployment rate in June followed three straight months of steady readings at 4.3%. The labor force has declined in four of the last six months, attributed to an immigration crackdown by the Trump administration.
Economists estimated the economy needed to create between zero and 50,000 jobs per month to keep up with growth in the working-age population. The labor force participation rate dropped to 61.5%, the lowest level since March 2021, from 61.8% in May. It was mostly driven by a 0.6 percentage point decrease in prime-age participation to 83.3%.
Household employment decreased 507,000 after rebounding 149,000 in May. The employment-to-population ratio, viewed as a measure of an economy’s ability to create employment, fell to 59.0% from 59.2%.
There were improvements in some household survey metrics. Fewer people worked part-time for economic reasons and there was a decline in those experiencing long bouts of unemployment, which pulled down the median duration of joblessness to 11.0 weeks from 11.6 weeks in May.
“The participation drop reflects the immigration slowdown,” said Chris Low, chief economist at FHN Financial. “While many Americans over the age of 16 are retired and not interested in work, most new immigrants seek jobs and therefore have a higher participation rate.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)