U.S. Adds 147,000 Jobs in June, Unemployment Drops to 4.1%

The June employment report from the U.S. Department of Labor's Bureau of Labor Statistics presented a mixed picture of the labor market. Public and private payrolls grew by 147,000, surpassing expectations of around 110,000. This growth was largely driven by a surge in government hiring, particularly in state and local education, which added 73,000 jobs. However, private sector job creation lagged behind forecasts, adding only 74,000 jobs compared to the expected 105,000. This marked the weakest month for private employment since October 2024.

The unemployment rate fell to 4.1% from 4.2%, indicating a slight improvement in the job market. However, wage growth was softer than anticipated, with average hourly earnings rising by 0.2% month-over-month, below the consensus forecast of 0.3%, and up 3.7% year-over-year, missing the 3.9% estimate. The average workweek also dipped to 34.2 hours from the expected 34.3 hours, suggesting a deceleration in labor market activity. Additionally, factory jobs declined by 7,000, worse than the expected -5,000, and marking the third monthly decline in manufacturing employment in four months.

Despite these mixed signals, the overall job growth was interpreted positively by markets, leading to a rally in risk assets. Investors saw the report as a sign of continued economic resilience without an imminent overheating risk. However, a deeper analysis revealed growing fissures in the labor market. The strength in June headline payrolls was largely due to government hiring rather than broad-based private sector momentum. The rise in the unemployment rate to 4.1% from 4.0% also highlighted that the labor market may be approaching an inflection point.

Sector-level data showed that state government education added 40,000 jobs, with another 23,000 in local education. Health care continued to provide a consistent tailwind to employment growth, adding 39,000 jobs in June. Hospitals and nursing/residential care facilities led the way, along with a 19,000-job gain in social assistance. However, manufacturing shed 7,000 jobs, and professional and business services lost 7,000 jobs, including a further 2,600 drop in temporary help services. The leisure and hospitality sector added 20,000 jobs, down from prior months but still supportive of consumer-facing strength.

This unevenness paints a more nuanced picture of the labor market. While headline strength suggests the economy remains on firm footing, the underlying data shows softness in private hiring, flagging wage momentum, and a narrow reliance on a few stable sectors like health care and government to sustain payroll growth. For the Federal Reserve, the report muddies an already complicated policy backdrop. While Fed officials have said they are waiting for more confirmation that inflation is easing sustainably, the softer wage data may be welcomed. However, the stronger headline number combined with sticky services inflation and last week's upside surprise in the PCE report suggests the path to rate cuts remains uncertain. The repricing in rate expectations reflects this uncertainty, with the Fed no longer expected to act with urgency in September and may prefer to wait for additional confirmation from July CPI and employment data.