The BLS report published in June exceeded market expectations in terms of key indicators. Job growth amounted to 147,000, significantly higher than the consensus forecast of 110,000 and in line with the average for the last 12 months (146,000).
The statistics for the previous two months have been revised upward by a total of 16,000—in May, the increase was 144,000 jobs instead of the previous estimate of 139,000. Unemployment unexpectedly fell to 4.1% from 4.2% in May (the market had expected an increase to 4.3%). The growth in average hourly pay in June slowed to 0.2% month-on-month after 0.4% month-on-month in May, while the consensus forecast had predicted a smaller slowdown (0.3% month-on-month). In annual terms, growth decreased to 3.7% YoY, the lowest in almost a year, after 3.8% yoy in May (consensus assumed acceleration to 3.9%). The Fed considers wage growth of 3-3.5% YoY compatible with inflation at the 2% target. Thus, inflationary pressure from the labor market is gradually decreasing, while job growth is still strong.
This data was interpreted by the market as confirmation of the strength of the labor market, which allows the Fed to refrain from rushing to lower interest rates until the situation with tariffs and their impact on inflation, which J. Powell expects to see in the coming months, becomes clearer. As a result, market estimates (CME) of the probability of a rate cut at the July meeting fell to 4.7% from 23.8% the day before. The main expected scenario for the market remains a rate cut in September and December, with expectations that it will remain at its current level at the September meeting rising to 28.6%, while yesterday this probability was estimated at only 6%. The market's assessment of the likelihood that the Fed will cut rates no more than once this year has risen to 25% from 9% previously, while the assessment of more than two cuts by the end of the year has fallen to 30% from 56%.
Meanwhile, in our opinion, the apparently positive data hides several unpleasant surprises that may indicate that the labor market is not as strong as it appears, both in terms of labor demand and supply. These include, first and foremost, weak job growth in the private sector, a decline in the labor force (which has technically lowered the unemployment rate), and an increase in the number of discouraged job seekers. Thus, 1) the labor force declined by 130,000, and the labor force participation rate fell to its lowest level since December 2022 (62.3% versus 62.4% in May), 2) private sector job growth fell to 74,000 (the lowest since October last year) compared to 137,000 in May, below the consensus forecast of 105,000. An alternative report on private sector job changes from ADP, published the day before, was even more pessimistic: the first decline in jobs since 2023, with 33,000 jobs lost. 3) Job growth was mainly driven by an increase in public sector employment (+73,000), primarily in education at the state and municipal levels, as well as in the healthcare sector (+39,000). 4) The average work week fell to 34.2 hours from 34.3. 4) The number of people who have been unable to find work for a long time (27 weeks or more) increased by 190,000. 5) The number of “discouraged” workers who had previously been looking for work but stopped looking because they believed there were no jobs available for them increased by 256,000.
Employment growth in June was driven by several sectors: education, healthcare (+39,000), entertainment and hospitality (+20,000), and social assistance (+19,000). In other sectors, the change was minimal: industry -7,000, retail +2,000, wholesale trade -6,600, information services +3,000. The number of federal employees continues to decline (-7,000, and since January already -69,000), which is the result of the work of DOGE (Department of Government Efficiency).
As is well known, the BLS employment report is based on two surveys: one of companies and one of households. The household survey showed that the decline in unemployment to 4.1% occurred against the backdrop of a 130,000 decline in the labor force, including a 93,000 increase in the number of employed and a 222,000 decrease in the number of unemployed. The decline in the labor force is occurring against the backdrop of weakening economic momentum (GDP in Q1 2025 declined by 0.5%), which was affected by tariff increases and Trump's policy of deporting illegal immigrants. From March to June, the number of foreign-born workers fell from 33.7 million to 32.6 million. This could hold back the long-term potential for US economic growth and at the same time limit the rise in unemployment as the economy and demand for labor are expected to slow. As J. Powell previously noted, hiring indicators have declined and it has become more difficult to find work, but this is offset by low layoff rates.
The next key report before the Fed meeting should be the inflation report, which will be released on July 15.
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