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SOFT ROCK: A PAYROLLS DEEP DIVE

The June employment report managed to be weaker than expected, but also reassuring.

The U.S. economy added 57,000 jobs last month, USNFAR=ECI, or 48.2% shy of consensus.

Adding insult to injury, the number marks a 55.8% slowdown from May, which was revised sharply downward, to 129,000 from 172,000.

This marks the sixth downside surprise in the past 12 months, and the eighth reading to fall short of 100,000 adds over the same period.

Digging beneath the headline, a 39,000 increase in the often lower-wage services sector was responsible for 79.6% of the 49,000 private-sector job additions, up from the 76.7% share in May. Goods-producing and construction sectors added 10,000 and 11,000 jobs, respectively. The manufacturing sector added 3,000 workers, in line with expectations. The retail sector shed 7,500 jobs while government payrolls increased by 8,000.

In a case of bad news equals good news, however, the report lessened the odds of a near-term rate hike from Warsh & Co.

"This was a little bit cooler than the market expected ... but with the unemployment rate dropping to 4.2% and yearly hourly wages at 3.5%, this could be considered a Goldilocks report," Peter Cardillo, chief market economist at Spartan Capital Securities, tells Reuters.

Financial markets are currently baking in 44.8% and 47.2% respective odds of a rate hike at the conclusions of the Fed's October and December meetings, up slightly from yesterday, according to CME's FedWatch tool. But the likelihood of a rate hike this month cooled a tad, to 17.6%.

The report also gave markets their first glimpse of June inflation, showing average hourly wages held firm at 0.3% on a monthly basis, but heated up to 3.5% year-over-year. Both numbers stuck the landing, as far as analysts are concerned.

Markets will welcome as-expected wage growth. But while wage growth is stronger than core CPI, it's cooler than headline consumer price growth. That puts real wage growth in negative territory. That bodes ill for the consumer, who carries about 70% of the U.S. economy on his or her shoulders, and has grown increasingly reliant on savings and credit to make ends meet.

"Wages continue to decouple from productivity gains, and wage growth at 3.5% yearly is solidly below inflation (most recent read at 4.2%), which continues to squeeze many household budgets," says Nicole Bachaud, economist at ZipRecruiter.

On the surface of things, the jobless rate USUNR=ECI unexpectedly dipping to 4.2% from 4.3% might be a reason to celebrate.

But before anyone pops the champagne cork, the labor market participation rate dipped to 61.5%, the lowest since March 2021, when the economy was clawing its way out of the COVID abyss. Excluding the pandemic, you'd have to go back to 1976 to find a lower participation rate.

When labor market participation dips, so do unemployment rates; when folks leave the workforce, they are no longer counted among the unemployed.

"Looking beyond the one-month change, data over the past year confirms the trend," writes Jim Baird, chief investment officer at Plante Moran Financial Advisors. "Participation has declined by nearly a full percentage point over the past year, with the estimated scale of the workforce shrinking by 720,000 over that period despite an increase of nearly 1.6 million in the pool of potential workers."

"Absent that reduction in participation, and unemployment would be above 5%," Baird adds.

The average unemployment duration plunged to 23.7 weeks from May's 26.8. That doesn't quite jibe with deteriorating labor market confidence.

It's more likely related to the drop in participation, along with the uptick in the number of Americans who have grown discouraged with job prospects and have left the labor market.

Broken down by race and ethnicity, joblessness among White workers ticked lower, to 3.6% from 3.8%, still well below the national average. Unemployment among those who identify as Hispanic increased to 5.2%, while Asian unemployment inched up to 3.9%. The jobless rate among Black workers held at 6.6%, the lowest level in a year.

Taken together, the White/Black jobless gap widened to 3.0 pps.

Other data released on Thursday included initial jobless claims, which essentially moved sideways at 215,000 and undershot expectations by 2.3%, and new factory orders, which dropped 1.3%, not quite as steep as the 1.5% drop economists predicted.

(Stephen Culp)

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