United States: Strong payroll gains in June assuage investors’ fear and decrease odds of a July Fed rate cut
The June jobs report released by the Bureau of Labor Statistics (BLS) showed a sharp rebound in payroll growth following a meek reading in May, suggesting that economic momentum—while waning—remains quite resilient for now, and somewhat reducing the odds that the Federal Reserve will cut interest rates at its next meeting on 30–31 July. Non-farm payrolls increased a strong 224,000 in June, up from a downwardly revised 72,000 in May (previously reported: +75,000) and comfortably outpacing the 165,000 expected by market analysts. In total, revisions to past months’ data subtracted a net 11,000 jobs. Nevertheless, the three-month average payroll gains in June came in at a solid 171,000, above the 100,000 needed to absorb new entrants in the workforce.
Looking at the details, the May report showed strength in several key sectors, both in the service and industrial sectors. Regarding industry, both construction and manufacturing payrolls rebounded solidly. The improvement in manufacturing payrolls was especially surprising given its past weakness and the escalation of trade tensions in the month—both with China after President Trump raised tariffs in May, and with Mexico when Trump threatened to apply tariffs over the border situation in early June.
In the service sector, payroll gains were strong in education and health services, as well as in professional and business services, though headcounts of temporary service workers increased only modestly. In addition, payrolls solidly rebounded in transportation and warehousing—positive news given the ongoing shortages of truck drivers in a large part of the country—as well as in government, due primarily to headcount increases in state and local government. On the other hand, the main negative point of the print came from the retail sector, which continued to shed jobs as it had in past months, albeit at a slower rate than in May.
Meanwhile, the unemployment rate ticked up to 3.7% in June, from 3.6% in May and confounding market expectations of a stable print. However, this was due to the positive news that the labor force participation rate increased slightly, from 62.8% to 62.9%. On the flipside, earnings data was again muted for the third month running, with hourly earnings increasing 0.2% month-on-month and annual wage growth ticking up to 3.1%, up from a revised 2.9% in May but missing market expectations of 3.2%.
Commenting on the reading, James Knightley, chief international economist at ING, noted: “taking it all together it is an encouraging report that suggests the broad economy is currently shrugging off the US-China trade uncertainty. We do expect employment growth to slow, but this will be more down to a lack of workers with the right skills to fill vacancies rather than any meaningful downturn in demand.”
Turning to the implications for monetary policy, while a Fed rate cut in July is still likely, the better-than-expected outturn in the labor market in June should give ammunition to hawkish FOMC members arguing for a more patient approach. Therefore, it should reduce the likelihood of a 50-basis-point rate cut and also reduce the odds of a 25-basis-point cut to a smaller extent.