Employment Growth Cools, Unemployment Rate Rises
The latest June jobs report from the Bureau of Labor Statistics has raised concerns about the health of the US labor market. While there were 206,000 jobs added to US payrolls last month, downward revisions to prior months' data painted a picture of a more rapid slowdown than previously anticipated.
- Combined revisions for April and May showed 111,000 fewer jobs added than initially estimated.
- This brought the three-month average of job gains down to approximately 177,000, a significant reduction from the 269,000 seen in the first three months of the year.
- The unemployment rate ticked up from 4% to 4.1%, marking its highest level in almost three years.
Approaching Sahm Rule Threshold, Wage Growth Remains Strong
The data suggests that the labor market is weakening, aligning with the "Sahm Rule" created by economist Claudia Sahm. This rule identifies the difference between the current three-month average of the unemployment rate and the lowest three-month average over the past year; when this difference reaches 0.5 percentage point, it has historically signaled the onset of a recession. The current difference stands at 0.4 percentage point, approaching the critical threshold.
Despite the slowdown, the report offered some positive news: wages continued to rise at a solid pace, outpacing inflation.
- Average hourly earnings rose 0.3% in June, up 3.9% year-over-year, though this is the lowest annual growth rate since 2021.
- The labor force participation rate among prime-age workers (those aged 25-54) climbed to 83.7%, hitting a new high for this economic cycle and matching a rate last seen in 2002.
Implications for the Federal Reserve and Economic Outlook
The softening labor market will undoubtedly be a focus for Federal Reserve officials at their upcoming policy meeting. Fed Chair Jerome Powell has repeatedly stated that if the labor market were to weaken unexpectedly, the Fed is prepared to cut interest rates.
- The Fed's median forecast anticipates the unemployment rate to average 4% in the fourth quarter, below the June reading.
- However, Powell has emphasized that the labor market tends to weaken quickly and the Fed is not waiting for this to happen.
- The June jobs numbers alone may not be sufficient to trigger an immediate rate cut, but paired with softer readings on inflation and consumer spending, a September rate cut is becoming increasingly likely.
The weakening labor market signals that the economy is losing momentum. While the data does not yet indicate a recession, it raises concerns about the Fed's ability to continue its inflation fight without further weakening the labor market, which is a key pillar of the economy.