The labor market is losing steam
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Illustration: Sarah Grillo/Axios
The labor market is showing signs of weakness, with employers easing hiring and a rising share of jobless Americans.
Why it matters: The June jobs report offers the clearest sign yet that the economy is losing momentum.
- The data is not recessionary, but it shows that the Federal Reserve might not be able to continue its inflation fight without risking further weakness in a labor market that is the bedrock of the economy.
What they're saying: "The broad host of economic data all point to a softening," Seema Shah, chief global strategist at Principal Asset Management, wrote in a note Friday. "Today's report adds to that picture."
By the numbers: There were 206,000 jobs added to U.S. payrolls last month, a decent gain. But downward revisions to prior months' data show a more rapid slowdown than previously thought.
- There were a combined 111,000 fewer jobs in April and May than first estimated.
- That brings the three-month average of job gains to roughly 177,000 — a step down from the 269,000 seen in the first three months of the year.
The big picture: The unemployment rate kept ticking up, rising from 4% to 4.1%, the highest in almost three years.
- The rise in the jobless rate has been gradual — not the rapid rise normally seen at the onset of a recession — but once the labor market starts weakening, it tends to keep doing so.
- With the June data in hand, the economy is close to triggering the "Sahm Rule," created by economist Claudia Sahm, which has a strong track record of signaling in real-time when the economy is in recession.
- The rule examines the difference between the current three-month average of the unemployment rate and the lowest three-month average over the past year.
- That difference now stands at 0.4 percentage point. The traditional Sahm Rule trigger is 0.5 percentage point.
The intrigue: There was some good news in the report. Wages continue to rise at a solid clip and outpace inflation. Average hourly earnings rose 0.3% in June, up 3.9% since last year, though that is the lowest annual rate since 2021.
- The labor force participation rate among prime-age workers (those aged 25-54) rose to 83.7% — a new high for this cycle, and matching a rate last seen in 2002.
- "Today's report shows the temperature of the labor market is still pleasant, but if current trends continue the weather could get uncomfortably cold," Indeed economist Nick Bunker wrote Friday.
What to watch: The softening in the labor market will receive serious focus from Fed officials as they gather for a policy meeting at the end of this month, bolstering the arguments of those who see cause to cut interest rates sooner rather than later.
State of play: Fed chair Jerome Powell has repeatedly said, including at last month's press conference, that if "the labor market were to weaken unexpectedly," the Fed is "prepared to respond," meaning cut interest rates.
- Responding to a question, he specified that means worsening by more than is reflected in officials' current forecasts. At the time, the median Fed official anticipated the unemployment rate to average 4% in the fourth quarter, below the June reading.
- He added that the labor market tends to weaken quickly. "Waiting for that to happen is ... not what we're doing. You know, we're watching very carefully; we're looking at the balance of risks."
Between the lines: The June jobs numbers in isolation probably aren't enough to trip that alarm bell, but paired with softer readings on inflation and consumer spending, a September interest rate cut now looks more likely than not.
- As of Friday morning, the CME's Fedwatch tool now puts roughly 75% odds on at least one interest rate cut by the Fed's policy meeting concluding Sept. 18. Futures markets placed 64% odds on that outcome a week ago.
What's next: Powell is testifying on Capitol Hill next week for the semiannual monetary policy report, out Friday morning.
- At the Senate Banking Committee on Tuesday and House Financial Services on Wednesday, he will have the opportunity to fine-tune his message on the labor market and the rates outlook.

