Soft Landing? US Job growth beats expectations, but unemployment rises

June sees job growth exceed expectations while unemployment rate hits highest since October 2021

Soft Landing? US Job growth beats expectations, but unemployment rises

The US economy added slightly more jobs than expected in June, though the unemployment rate increased, as reported by the Labor Department on Friday.

Nonfarm payrolls rose by 206,000 for the month, surpassing the Dow Jones forecast of 200,000 but falling short of the revised gain of 218,000 in May, according to CNBC.

The unemployment rate climbed to 4.1 percent, tied for the highest level since October 2021. This development presents a conflicting sign for Federal Reserve officials considering their next monetary policy move.

Jan Hatzius, chief economist at Goldman Sachs, described the report as a “soft landing kind of report” on CNBC’s “Squawk on the Street.” He suggested that the Federal Reserve might cut rates soon, with September being the most likely timeframe.

The rise in the unemployment rate coincided with an increase in the labour force participation rate to 62.6 percent, as noted by CNBC. The prime age rate, which includes individuals aged 25 to 54, reached 83.7 percent, the highest in over 22 years.

The broader unemployment rate, which counts discouraged workers and those holding part-time jobs for economic reasons, held steady at 7.4 percent.

Household employment, used to calculate the unemployment rate, increased by 116,000, while full-time workers decreased by 28,000 and part-time workers increased by 50,000.

June job creation was bolstered by a 70,000 surge in government jobs, with significant contributions from the health care sector (49,000), social assistance (34,000), and construction (27,000).

However, declines occurred in professional and business services (-17,000) and retail (-9,000). Average hourly earnings rose by 0.3 percent for the month and 3.9 percent from a year ago, with the average work week remaining steady at 34.3 hours.

Stock market futures rose following the report, while Treasury yields were negative. Traders increased bets that the Federal Reserve might implement an initial interest rate cut in September, according to CNBC.

David Russell, global head of market strategy at TradeStation, noted, “The job market is bending without yet breaking, which boosts the argument for rate cuts.” 

The Bureau of Labour Statistics made substantial revisions to previous payroll counts, reducing the April and May totals by 111,000 combined. Long-term unemployment rose sharply by 166,000 to 1.5 million, compared to 1.1 million a year ago.

The unemployment rate for Black workers increased to 6.3 percent, its highest since March, and the rate for Asians jumped to 4.1 percent, the highest since August 2021.

Federal Reserve officials are contemplating their next moves on monetary policy, as the latest meeting minutes indicated a need for more progress on inflation before lowering interest rates.

Despite this, markets are pricing in two rate cuts before the end of 2024, assuming quarter percentage point reductions.

Robert Frick, corporate economist at Navy Federal Credit Union, said, “There are no cracks here that would cause the Fed to rush to the rescue with rate cuts, and the labour market is in line with a continuation of slowing inflation.”

The Federal Reserve’s key lending rate targets between 5.25 percent and 5.50 percent, the highest in 23 years. Recent signs of cracks in the labour market, including purchasing manager surveys showing hiring contractions in both the manufacturing and services sectors, are concerning, according to CNBC.

Broader economic growth is also slowing, with the gross domestic product increasing just 1.4 percent annualized in the first quarter and projected to grow at 1.5 percent in the second quarter, based on Atlanta Fed data.

According to CNN, markets remained mostly unchanged but slightly higher on Friday afternoon following the employment snapshot. Economists consider the labour market strong, though slowing and returning to normal after a rapid pace in recent years.

Traders are optimistic about the slight uptick in the unemployment rate, suggesting potential interest rate cuts later this year. Rick Rieder, BlackRock’s chief investment officer of global fixed income, stated, “The Fed should be lifting a glass to and toasting a more normal (and no longer overheating) jobs picture.”

CNN reported that the S&P 500 was on track to close at another record high, with all major indexes heading toward a winning week. The Dow was 50 points, or 0.1 percent lower, the S&P 500 was up 0.4 percent, and the Nasdaq was 0.8 percent higher. 

Fed officials are currently evaluating when to cut interest rates, which are at their highest level since 2001. The challenge lies in the timing of these cuts, as the economic outlook remains uncertain.

Rising unemployment could indicate that interest rates have been too restrictive for too long, suggesting that rate cuts should have occurred sooner to minimize economic fallout, as reported by CNN.

The June jobs report showed a stable but slowing employment gain of 206,000, with a significant decline in temporary help services employment, dropping by 48,900. This category is closely watched by economists as a forward-looking indicator.

Jack McIntyre, portfolio manager at Brandywine Global, noted that the sharp decline in temporary help might signal future weakness in the labour market this summer.

He added, “It is also taking longer for folks to find a new job, which might be a sign of future weakness in employment is in the offing,” according to CNN