A remarkable run of monthly job gains continued in June as the American economy generated 209,000 new jobs and the unemployment rate fell to 3.6%.
For the year, 1.67 million new jobs have been created, an average of more than 278,000 jobs each month, according to data released by the Bureau of Labor Statistics on Friday.
The employment report also included a downward revision of 110,000 jobs over the previous two months. The household estimate of hiring, a separate survey that includes self-employed workers and those on unpaid leave, implied a gain of 273,000 jobs in June.
As one would anticipate following the historic disruption of the pandemic, demand for services continues to be the foundation of the current economic expansion. Service sector employment this year has increased by 1.17 million jobs, or roughly 65.9% of all jobs created this year.
As such, wage gains increased by 0.4% in June and were up by 4.4% on a year-ago basis. Wage gains increased by 4.3% on a three-month average annualized pace, which is still too hot for policymakers at the Federal Reserve as they try to restore price stability.
The policy implication of the June jobs report and the trend in hiring point toward at least one more interest rate increase by the Fed, most likely by 25 basis points to a range between 5.25% to 5.5% later this month.
After that, unless core services excluding housing pricing unexpectedly accelerates downward, the Fed may increase rates again when it meets in September.
Behind the labor market’s enduring strength are structural and demographic changes in the workforce that have resulted in an economy that is far less sensitive to interest rate hikes than in the past. Sustained job gains at this pace despite an easing in the top-line inflation number—core services excluding housing is not cooling at an acceptable pace—simply demand a higher policy rate.
Job gains have been too strong for central bankers who are fixated on bringing core inflation down to a 2% long-term trend.
We think that June’s strong top-line jobs number is in line with the true underlying pace of job growth than the average monthly gain of more than 278,000 through the first six months of the year.
Read more perspectives on economic headwinds facing the middle market.
But the resilience of the economy in light of the twin inflation and interest rate shocks over the past two and half years should not be overlooked even as hiring and wage growth cool.
Yes, there are likely to be downward revisions to recent estimates of job gains. But even after those anticipated downward revisions, job gains are in line with the modest 1.8% average growth in the economy during the first half of the year.
Wage gains are strong but moderating, and that should create the conditions for a near-term peak in the policy rate as top-line inflation moves back toward 3% in the near term.
On August 23, the Bureau of Labor Statistics will release the preliminary estimate of the annual benchmark revision to the establishment survey data. This is the same day that the Quarterly Census of Employment and Wages for the first quarter will be issued by the BLS.
Preliminary benchmark revisions for all major industry sectors, as well as total nonfarm and total private employment, will be available.
The data
Jobs gains in June were fueled primarily by gains in higher-paying sectors, including goods-producing, construction, manufacturing, professional business services, government and health care jobs. These included an additional 29,000 goods-producing jobs, 23,000 construction positions and 7,000 manufacturing jobs.
The private service sector added 120,000 jobs in June of which there was an increase of 10,000 positions in finance, 21,000 in professional business services and 73,000 private education and health care jobs.
The labor force participation rate remained unchanged at 62.6%.
There was a total decline of 22,000 jobs in trade and transport, half of which included an 11,000 drop in retail trade, and a 13,000 decline in temp jobs. Government hiring increased by 60,000, and leisure and hospitality hiring increased by 21,000.
Employment showed little or no change over the month in other major industries, including mining, quarrying, and oil and gas extraction; wholesale trade; information; and other services.
Aggregate hours worked in June increased from 114.8 to 115.3, which is a 0.4% monthly gain or 0.1% on a three-month average annualized pace.
The civilian labor force increased by 133,000 to 166.951 million and the labor force participation rate remained unchanged at 62.6%. The median duration of unemployment stands at 8.7 weeks, which implies that demand for labor remains strong and that those workers who lose jobs are not having a problem finding new employment.
The takeaway
The U.S. economy is generating an abundant number of jobs and strong wage gains. Those facts, along with easing top-line inflation, are the primary catalysts behind the recent improvement in consumer confidence and are the foundation for an economy that is growing near its 1.8% long-term trend.
While there are areas of the economy, like manufacturing, that are experiencing retrenchment, the broader service sector remains in good shape. That sector is powered by what we think is roughly $670 billion in excess savings that will continue to support demand for services at a modest pace through the end of the year.
As long as the economy continues to produce more than 200,000 jobs a month, the economy is going to muddle through a challenging post-pandemic transition characterized by inflation and interest rate shocks that are nearing an end.
The resilience of the economy, supply side improvements from better infrastructure and the promise of productivity gains through artificial intelligence should bolster the economy and its people once those shocks abate.
