The U.S. economy added 57,000 jobs in June, falling short of the consensus estimate of 113,000 and the blowout 172,000 jobs created in May (downwardly revised to 129,000). Additionally, the unemployment rate fell slightly to 4.2%. While labor market conditions have remained surprisingly resilient throughout the first half of the year, today’s data represents a cooling from that momentum. The labor force participation rate dropped to 61.5%. The Investment Committee believes that ongoing tensions in the Middle East will likely weigh on U.S. economic growth over the longer term, as higher oil and gasoline prices reduce consumers’ discretionary spending. Producer inflation has increased by 2.2% over the last two months and is now running at a lofty 6.5% year over year. Persistent inflation, alongside continued labor market strength, has led policymakers to adopt a more hawkish stance, giving the Federal Reserve flexibility to keep interest rates elevated if inflation remains elevated for an extended period.
This morning’s Nonfarm Payroll results come after Yesterday’s ADP report, which showed job gains of 98,000, below the 110,000 consensus and May’s gain of 122,000. Nearly half of the job growth in June (48,000) came from the education and health service sectors. Other sectors posting increases included trade, transportation, and utilities, adding 15,000 positions; financial services, adding 14,000; other services, adding 8,000; information services, adding 7,000; manufacturing, adding 5,000; and leisure and hospitality, adding 2,000 positions. Natural resources and mining lost 5,000 jobs, the only sector posting a decline. Employment gains were skewed towards companies with fewer than 50 employees, which added 53,000 jobs, while the remaining 45,000 jobs were spread across mid-sized and large companies. Based on salary, annual pay held steady at 4.4% for those staying in their jobs, while increasing by 6.6% for those that changed positions.
Entering this month, the labor market continued to surprise to the upside. Through the first six months of the year, Nonfarm Payrolls increased by an average of 104,000 jobs per month, a significant improvement from the average monthly gain of just 10,000 jobs during all of last year. As a result, some Federal Reserve officials have adopted a more cautious stance on monetary policy, citing the combination of a resilient labor market and sticky inflation. Fed funds futures are now pricing in a higher probability of an interest rate increase by year-end. Despite political pressure to lower interest rates, the Investment Committee believes inflation remains the more significant near-term risk, particularly given elevated energy costs.