Key takeaways
The U.S. job market expanded in June for the 42nd consecutive month, with the number of new jobs outpacing market expectations.
206,000 new jobs were added in June, slower than May’s rate, but still considered healthy growth.
The unemployment rate edged higher to 4.1%.
The U.S. labor market, a key indicator of the economy's strength, remains in a healthy state, but is showing signs of slowing, based on the June jobs report from the U.S. Bureau of Labor Statistics. The U.S. economy added 206,000 new jobs during the month, outpacing market expectations but modestly down from the previous month’s growth rate. Notably, the June report included a downward revision of job growth numbers for April and May. The total adjustment for those two months reduced the total number of new jobs by 111,000, a sizable correction that paints a slightly less rosy job market picture. 1
The nation’s unemployment rate, which until May remained below 4% for 27 consecutive months ticked higher again in June. The unemployment rate now stands at 4.1%, the highest since November 2021. 2 While the unemployment rate has trended upward, “The 4% number is not a specific concern at the moment,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “It will only become an issue if we see a surprising upturn from here.”
Investors are keeping a close eye on the labor market as a barometer not only of the economy’s strength, but what it may signal to the Federal Reserve as central bankers assess monetary policy. The Fed has maintained its federal funds target rate in the 5.25% to 5.50% range since July 2023. Despite projections that it may begin cutting rates this year, a move that investors would welcome, the Fed has delayed rate cuts for now because of concerns that it has not yet squelched the inflation threat that led to rate hikes in the first place.
Does today’s job market provide any guidance for investors as they set expectations going forward?
Over 2024’s first half, non-farm payrolls grew by an average of 222,333 jobs per month, continuing a downward trend since the economy began to emerge from the COVID-19 outbreak in the early 2020s. 3 Data provided in the June jobs report significantly lowered 2024’s monthly job growth average.
Source: U.S. Bureau of Labor Statistics as of June 30, 2024.
The most notable June job gains occurred in government, healthcare, social assistance, and construction. 1
Even at the current 4.1% level, the unemployment rate is only marginally higher than the most recent low of 3.4% reached in April 2023.
Source: U.S. Bureau of Labor Statistics as of June 30, 2024.
There continues to be an unusual imbalance between the number of job openings and the availability of individuals seeking employment. At the end of May 2024, according to the U.S. Bureau of Labor Statistics, there were 8.1 million job openings in the U.S., compared to 5.2 million unemployed persons. That means there are more jobs than unemployed people seeking work. 4 The number of job openings trended lower in 2024 but stabilized in May. “While we’ve seen some softening in the labor market, it’s not yet a significant change in the general trend.” says Haworth. “Today’s imbalance still favors workers, and that could keep wage pressures elevated.”
“Improving labor participation is one way to address the tightness in the labor market that’s propping up wage gains.”
Matt Schoeppner, senior economist at U.S. Bank
One measure economists watch to forecast potential changes in labor market trends is the weekly new jobless claims report. In the most recent report, issued July 3, 2024, initial jobless claims stood at 238,000. 5 Although the trend shows modestly higher initial jobless claims over the course of 2024, the change is not considerable, and initial weekly jobless claims remain below the highest levels reached in 2023. 5 “If you look at long-term history, sub-300,000 initial weekly jobless claims is considered a fairly healthy level for the economy,” says Haworth. “At the same time, recent reports show people aren’t leaving jobs at the rate they once were. That’s an early signal of a slightly softer labor market.”
The labor force participation rate, representing the percentage of the population currently in the workforce, was 62.6% in June, generally consistent with the rate throughout 2024. 1 Labor force participation is considered a key barometer of the broader economy’s health. The labor force participation rate was higher, at 62.8%, between August and November 2023. 3 “Improving labor participation is one way to address tightness in the labor market that’s propping up wage gains,” says Matt Schoeppner, a senior economist at U.S. Bank.
The labor market is holding up despite recent economic slowing. The nation’s economy, as measured by Gross Domestic Product (GDP), grew at an annualized rate of 1.4% in 2024’s first quarter. That’s slower than 2023’s 2.5% rate of GDP growth. 6 Signs of slower economic growth have not significantly altered the inflation picture. The most recent reading of the Consumer Price Index showed inflation at 3.3% for the 12 months ending in May 2024. Inflation has lingered between 3% and 3.7% since June 2023. 3 “The Fed is looking for incremental, month-to-month declines in living costs,” says Haworth. “Even though Fed officials don’t indicate an expectation of inflation reaccelerating, they also don’t appear to be convinced that rate cuts should occur just yet.”
Haworth notes that the Fed is closely monitoring average monthly wage growth, which dropped to 3.9% for the 12 months ending in June after a jump to 4.1% in May. 1 “The Fed is likely awaiting a sustained, downward trend in wage growth as a positive sign that inflation is easing,” says Haworth.
Source: U.S. Bureau of Labor Statistics. *As of June 30, 2024..
Fed Chair Jerome Powell, in early July, said that because of recent inflation and labor market trends, “We’ve made quite a bit of progress in bringing inflation back down to our target.” Yet Powell indicated “We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening (interest rate) policy.” 7
According to Schoeppner, the job market’s ongoing strength may complicate the Fed's rate cutting plans. A tight labor market offering more competitive wages has played an important role providing consumers the wherewithal to maintain higher spending levels. That has likely contributed to inflation’s persistency.
Investors continue to closely follow jobs data for signs of a more significant slowdown, which could provide the Fed with the impetus to begin cutting interest rates. Lower rates are considered a way to provide a boost to the economy, which would likely help extend the stock market rally that began in 2023, and also boost the bond market.
Talk with a wealth professional if you have questions about your personal financial circumstances or investment portfolio.
The job market refers to the marketplace where individuals seek work and employers seek workers. The strength of the job market is considered one important measure of the current health of the broader economy. If more jobs are being created and demand for labor is high, it tends to reaffirm the presence of an expanding economy. By contrast, higher unemployment levels and low job growth (or a decline in job growth) indicate a slowing economy.
The unemployment rate, reported monthly by the U.S. Bureau of Labor Statistics, provides significant insight into the health of the nation’s economy. Generally, the lower the unemployment rate, the stronger the economy is likely to be. The unemployment rate is also one of the mostly closely followed indicators. It’s important to note that the unemployment rate reflects people who are out of work but still seeking employment. It does not reflect others who have stopped looking for work or consider themselves no longer in the labor force.
When the unemployment rate moves higher, it indicates potential weakening of the economy. Consumers may consider holding back on purchases if they have concerns that they, themselves, could face unemployment in the near future. If that occurs, it can potentially contribute to further economic weakness. When unemployment is low, it’s a good indicator that the economy is strong and expanding.
The Federal Reserve is focused on fighting inflation with monetary policy intended to slow consumer demand. Does this put the economy at risk of a recession?
With inflation retreating and interest rate cuts likely coming later this year, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
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