US Job Market in Decline: New Hopes for Interest Rate Cuts

The latest data from the US labor market in June indicated a slowdown in job gains and wage growth, while the unemployment rate rose to its highest level since the end of 2021. These developments support expectations that the Federal Reserve will cut interest rates in the coming months. The number of non-farm employees increased by 206,000, with the statistics agency revising job gains from the past two months downwards by a total of 111,000. These figures exceeded the forecasts of economists, who had predicted an increase of 190,000 in a Bloomberg survey. Meanwhile, the unemployment rate rose to 4.1% as more people entered the labor market, and the average hourly earnings cooled down. The average employment growth over the past three months fell to its lowest level since early 2021, indicating a greater-than-expected cooling effect in the labor market in the second quarter. These data align with other reports showing a significant decline in job openings and an increasing number of unemployment benefit claims this year. A continued decline in new hires, combined with recent moderation in inflation, bolsters hopes that the Fed could reduce interest rates as early as September. The current job report will be the last before Fed officials meet later this month. "The downward revisions of the previous two months combined with the increase in the unemployment rate are significant data points. Wage growth is also slowing," said Kathy Jones, chief fixed income strategist at Charles Schwab. "All of this adds up to a slow-down trend." Treasury yields fell and the S&P 500 opened unchanged following the report. Investors are currently pricing in two Fed rate cuts this year, according to futures. These figures could shift the Fed's perception of risk balance, as rising unemployment occurs amid moderating inflation. Minutes from the Fed's June meeting show growing concern that a further economic slowdown will lead to a higher unemployment rate. The labor force participation rate—the share of the population that is working or looking for work—rose to 62.6%. The rate for individuals aged 25 to 54, also known as core workforce, reached a 22-year high of 83.7%. In June, about three-quarters of the new jobs were in the health sector and public administration. One worrying sign was the largest drop in temporary help jobs in over three years. Employment in the manufacturing sector also saw its steepest decline since February. Wage growth continued its cooling trend. Average hourly earnings increased by 3.9% year-on-year in June, the smallest annual rise in three years. Wages for production and non-supervisory employees, who make up the majority of workers, rose by 4%. These numbers offer little support to beleaguered President Joe Biden, who faces growing demands from many Democrats to withdraw from his re-election campaign after a poor debate showing with his predecessor Donald Trump. "People are entering the labor market looking for jobs," said Acting Labor Secretary Julie Su on Bloomberg Television. "It takes them longer to find work, but we see a balance between labor supply and demand and employer expectations.