June jobs report adds to signs that economy may be cooling

The uptick in the June unemployment rate along with significant downward revisions in the job additions for April and May are the latest signs that the economy may be slowing down under high Federal Reserve interest rates.

The Friday numbers from the Labor Department showed the unemployment rate increasing to 4.1 percent in June from 4 percent in April, the third consecutive month of 0.1-percentage point increases.

Jobs added to the economy in May were revised down to 218,000 from 272,000, and in April to 108,000 from 165,000.

While the economy added a healthy 206,000 jobs in the first estimate for June, and while a 4.1-percent unemployment rate is low in absolute terms, the softer employment numbers for June highlight recent cautionary positions from the Fed’s interest rate-setting committee about future risks to employment levels.

The Fed hiked its baseline interest rate range up to between 5.25 percent and 5.5 percent last summer and has kept it at that level to bring inflation back down to its 2 percent annual goal. High interest rates are meant to fight inflation by sapping energy from the economy and forcing businesses to keep prices stable.

“Several participants specifically emphasized that with the labor market normalizing, a further weakening of demand may now generate a larger unemployment response than in the recent past when lower demand for labor was felt relatively more through fewer job openings,” read the minutes of the Fed’s June federal open markets committee meeting, which were released this week.

In May, the number of job openings for every unemployed person held steady at 1.25, down from its high point of two open jobs for every job seeker in 2022.

Wage growth decelerated in June, advancing by 10 cents to $35.00 an hour after advancing by 15 cents in May. On an annual basis, wages grew by 3.9 percent in June, which is still above inflation but down from 4.1 percent in May. Wage growth has generally been declining since it hit 5.9 percent in March 2022.

Wage growth for nonmanagers has decreased at a faster pace, falling from a 7-percent annual increase in 2022 to 4 percent in June.

As wage and employment have cooled, so has inflation. The consumer price index decreased in both April and May, though it stands above the Fed’s target range at 3.25 percent.

Employment readings in the ISM services report fell well below expectations in June, falling below the May numbers by a full 5 percentage points.

“June Services [levels] indicates the overall economy is contracting for the first time in 17 months,” ISM’s Steve Miller wrote in an analysis.

The slowdown in labor conditions may be related to the waning effects of fiscal protection measures enacted by Congress in the wake of the pandemic, such as $800 billion in paycheck protection program loans for small businesses.

The IRS is still getting employee retention tax credit claims to the tune of 17,000 per week, though a whistleblower told congressional tax writers earlier this year that as many as 95 percent of them are fraudulent.

Democrats focused Friday on the additional jobs added to the economy and levels of consumer confidence.

“It’s another month of solid job growth under President Biden,” House Ways and Means Committee ranking member Rep. Richard Neal (D-Mass.) said in a statement.

Republicans said too many of the new jobs were in the public sector as opposed to the private sector.

“There were 70,000 new bureaucrats put on payroll, while 8,000 manufacturing jobs were cut. New jobs should be the result of a growing economy, not more government spending,” Ways and Means Chair Jason Smith (R-Mo.) said.

A growing chorus of private sector economists is saying it’s time for the Fed to cut interest rates, recognizing signs that the economy may finally be slowing down after an extended period of better-than-expected employment and economic growth.

“It’s time for the Federal Reserve to cut interest rates,” Moody’s Analytics lead economist Mark Zandi posted on social media. “That’s the message in today’s jobs report for June. Unemployment while still low is steadily notching higher. Job and wage growth while still strong are steadily moderating. The Fed has met its full employment mandate.”

Lazard chief market strategist Ron Temple concurred, saying, “Overall, it’s a Goldilocks labor market that is neither too hot nor too cold and doesn’t warrant such restrictive monetary policy.”

International economists are making similar encouragements, even as the Fed has said it needs to see further indications that inflation is coming down before cutting rates.

“The Federal Reserve minutes of the June meeting suggested a desire for more evidence of cooling inflation before cutting rates. Some economists (including this economist) are getting frustrated. Harmonized inflation is below 2 percent and there is deflation for almost every sector of the economy somewhere in the US; how much more slowdown is required?” UBS economist Paul Donovan wrote in a Thursday analysis.