June jobs report: An uncomfortable number

Market response

July 7, 2023 | 2 min read
Seema Shah
Chief Global Strategist

The June jobs report disappointed lofty market expectations, as nonfarm payrolls rose 209,000, a drop from 306,000 in May. A number above 200,000 can hardly be considered weak, but yesterday's blowout ADP number had wrongfooted investors into expecting another banner payrolls report. Markets will also note that this was the smallest monthly payrolls increase since December 2020. Yet, with average hourly earnings growth proving more robust than expected, today's report will give the Federal Reserve (Fed) little reason to hold from hiking policy rates at their July meeting.

Report details:

  • Total nonfarm payrolls rose 209,000 in June, while revisions lowered the last two months of payrolls numbers by 111,000.
  • Today's increase was slightly lower than consensus expectations for a 230,000 gain. In fact, following yesterday's strong ADP jobs report, market expectations for today's number had started to creep higher, and some analysts were even anticipating a 300,000+ number. Furthermore, June marks the first report in 15 months to deliver a downside, rather than upside, surprise.
  • Since the start of 2020, there have been only three months with lower payrolls numbers than today: the COVID months of March and April 2020, and December 2020. However, it is worth noting that pre-pandemic, a number above 175,000 would have been considered consistent with a strong economy. In that regard, today's 209,000 print is still quite strong.
  • Most sectors of the economy added jobs in June, including the struggling manufacturing sector. Education and health services added the most payrolls (73,000), while leisure and hospitality only added 21,000.
  • The unemployment rate slipped from 3.7% to 3.6% as employment in the household survey rebounded from last month's confusing plunge, while the participation rate stayed broadly stable.
  • Average hourly earnings rose 0.4% on the month, slightly higher than expected, while the previous month's number was upwardly revised from 0.3% to 0.4%. Annual average hourly earnings growth rose from 4.3% to 4.4%, reinforcing that wage growth is sticky and too strong to be consistent with the Fed's 2% inflation target.

Today's jobs report may have been weaker than expected, but the broad picture remains constant: The U.S. economy continues seeing relatively strong job gains and stubbornly elevated wage growth. Against that backdrop, and assuming next week's CPI release does not deliver a significant downside surprise, it is highly likely that the Fed will raise policy rates to 5.25%-5.50% at its meeting in two weeks. The Fed will be able to digest two more payroll reports and one more CPI report by its following meeting in September. Without clear signs of softness in either the labor market or price pressures, investor focus may start turning to whether rate hikes will persist into September and, from there, questioning how much more monetary tightening the U.S. economy can realistically take before something breaks. One question that seems off the table is: can the Fed cut rates this year? Answer: no.

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