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June jobs report: Tighter immigration policy complicating the outlook

July 3, 2025 | 2 min read
Seema Shah
Chief Global Strategist
Christian Floro, CFA, CMT
Market Strategist
Magdalena Ocampo
Market Strategist
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The June jobs report showed a robust 147,000 gain in payrolls, above consensus expectations, dispelling concerns for an immediate resumption of the Fed cutting cycle as the labor market remains fairly solid. Yet, the surprise decline in the unemployment rate highlights that important structural forces are increasingly at play, adding complexity to deciphering traditional labor market signals.

Non-farm payrolls

Thousands, January 2022–present

Chart showing non-farm payrolls in thousands from January 2022 to present time

Source: Clearnomics, Bureau of Labor Statistics, Bloomberg, Principal Asset Management. Data as of July 3, 2025.

Report details

  • Total non-farm payrolls increased by 147,000 in June, above expectations and essentially matching last month’s (upwardly revised) 144,000 worker gain. Cracks continue to form in U.S. employment data, but aggregate conditions remain fairly solid. While policy uncertainty is an ongoing headwind for the U.S. labor market, there are also structural factors at play that add complexity to the broader outlook.
  • The overall job growth in June remained mixed across industries. The government sector led employment gains, adding 73,000 jobs—with gains in state & local more than offsetting continued layoffs in federal government employment—while healthcare added 39,000 jobs. A broad reduction in the labor force, combined with a pullback in federal government grant spending, will likely pose increasing headwinds on these sectors in the months ahead. Note that the BLS counts workers on paid leave or ongoing severance or leave as employed, suggesting the broader fallout from federal government layoffs may not materialize until the fall.
  • Meanwhile, strong gains in Leisure & hospitality, which added 20,000 jobs, continued to counter concerns about trade war uncertainty and a pull-back in tourism spilling over to the services sector. The construction sector also rebounded, gaining 15,000 jobs, the biggest increase since December 2024, despite concerns around elevated interest rates and labor supply availability.
  • Offsetting the strength in overall job growth is a decline in Professional & Business services, which lost 7,000 jobs, largely driven by scientific research and development. This is a sign that a pullback in government grant spending is negatively impacting the labor market.
  • Counterintuitively, the decline in the unemployment rate to 4.1% was not necessarily a reflection of labor demand strength but instead due to shrinking labor supply, with the labor force participation rate falling further to 62.3% from 62.4% in May. Declines in the foreign-born labor force could imply that a tightening in immigration policy is weighing on the labor pool. Meanwhile, average hourly earnings rose 0.2% in June, below expectations, bringing the annual rate to 3.7% from a downwardly revised 3.8%.

Policy outlook

While a few Fed speakers have mentioned their inclination to cut interest rates as early as July, today’s employment data, showing higher than expected payrolls, a drop in the unemployment rate, and a fall in jobless claims completely dispels their case for imminent easing and implies that there is no urgency for Fed support. We continue to expect the first rate cut to come in late 2025.

Looking ahead, it will be worth remembering that important structural forces are also at play, adding complexity to deciphering traditional labor market signals. As labor demand begins to soften, tighter immigration policies are also weighing on labor force growth. As a result, the breakeven pace of payroll growth is likely declining. This dynamic has three key implications: monthly payroll gains may decline due to limited labor supply rather than weakening economic activity; any increase in the unemployment rate should remain contained this year; and a tighter labor supply could keep wage inflation elevated, weighing on corporate profits.

Macro views
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