June Jobs Report Beats Expectations, but Trouble Lurks Below the Surface

• June nonfarm payrolls rose 147 thousand, easily beating the 110 thousand expected and slightly ahead of the 144 thousand in May (revised up from an initial 139 thousand).  Speaking of revisions, April was revised up by 11 thousand jobs bringing two-month revisions higher by 16 thousand. Private sector job growth was 74 thousand which was short of the 102 thousand expected and about half of the downwardly revised 137 thousand in May (originally reported at 140 thousand). ADP’s 33 thousand decrease reported yesterday points again to the lack of insight provided from that series.

 

• Monthly revisions have generally been to the downside for well over a year, but that wasn’t the case in June. The BLS’s birth/death model of new business creation/demise has consistently overstated net business formation since the pandemic and that had been a big piece of the downward adjustment trend. Perhaps the BLS has finally tweaked the birth/death model to accurately reflect today’s economy? In any event, the average monthly gain over the last 12 months was 146 thousand, so June was right on that annual average.

 

• The Household Survey, which is smaller in size than the Establishment Survey and then extrapolated across population totals, generates the unemployment rate, labor force participation rate, etc.. That survey reported an increase of 93 thousand jobs and a 222 thousand decrease in unemployed persons. The labor force, however, fell for a second straight month, this time by 130 thousand. The decrease in the unemployment rate was helped by an decrease in unemployed persons (as counted by BLS) plus a decrease in the labor force such that the unemployment rate decreased a tenth to 4.1% (4.12% unrounded vs. 4.24% in May) better than expectations.

 

• Job gains were strongest in government surprisingly (73k total: State +47k, Local +33k, Federal -7k), and healthcare/social assistance, a perennially strong category, (59k). Other categories showing decent gains were leisure/hospitality (20k) and construction (15k). Job losses were concentrated in manufacturing (-7k), and temporary help (-3k) (see graph below).   Once again, it’s easy to see the strength in the service sector hiring vs. the goods side of the economy and that is what we’ve been seeing across a host of reports with services carrying the economy and that continues to be the case. The government gains came mostly at the State and Local level driven primarily by education hiring.

 

• With the decrease in the labor force, the Labor Force Participation Rate dipped two-tenths to 62.3%, missing the 62.5% expectation and May’s 62.4%. The dip in June brings the rate to the lowest level since December 2022. With deportations continuing, labor force participation will become a much more studied metric. The labor force has shrunk for two months in a row, typically not what you see in a growing economy. If a worker is deported, he is obviously removed from the labor force and the beginnings of that may be what we’re seeing in the falling labor force numbers:  smaller labor force leads to a smaller chance to grow the economy. Watch this metric in the months ahead. Another metric that uses a wider lens, so to speak, is the employment to population ratio and that is shrinking as well. It fell for a second straight month to 59.7%. This compares to a year ago when it was 60.0%, (see graph below).

 

• Average Hourly Earnings rose 0.2% (0.221% unrounded) MoM, missing the 0.3% expectation and the May gain of 0.4% (0.388% unrounded).   After three straight months at 3.9%, the year-over-year pace ticked lower to 3.7%, (3.714% unrounded) missing the 3.8% expectation. Also, after a four-month run at 34.3 average weekly hours worked, it fell a tenth to 34.2 hours, missing the 34.3 hours expectation. While a tenth of an hour doesn’t sound like much, extrapolated across 150 million workers every tenth of an hour is slightly more than $1 billion in earnings, that in this case were lost.

 

• The June jobs report beat headline expectations, and with the unemployment rate dipping to 4.1% instead of increasing to 4.3% the kneejerk reaction in markets is bearish on bonds while thoughts of a July cut are now a fading dream. We’re, however, not as sanguine over the results. Private payroll growth continues to slow, the labor force is shrinking, and hourly earnings and hours worked ticked lower this month. The bump in state and local hiring, mainly in education, saved the report from a more challenging interpretation.  Bottom line: the hiring machine has slowed significantly and outside of government that was the case this month. Layoffs, however, remain muted which is moderating the downside risk for now. The concern is that this slow-moving softening accelerates but there were enough positives in June to keep that worry at bay, for now. 

 

• Shifting gears, in the week ending June 28, initial jobless claims were 233,000, a decrease of 4,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 to 237,000. The advance seasonally adjusted insured unemployment rate was 1.3 percent for the week ending June 21, unchanged from the previous week’s unrevised rate. For the week ending June 21, continuing unemployment claims were 1,964,000, unchanged from the previous week’s revised level. The previous week’s level was revised down by 10,000 from 1,974,000 to 1,964,000. The 4-week moving average was 1,954,000, an increase of 15,500 from the previous week’s revised average. This is the highest level for this average since November 20, 2021, when it was 2,004,250. In summary, a fairly status quo week on claims with still no sign of layoffs ramping.

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State and Local Government Led Job Gains in June (Mostly in Education)

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Initial Jobless Claims Drop but Continuing Jobless Claims Continue Near Recent Highs