What labor market data says about the economy

The economy added 206,000 jobs last month, new government data shows, but unemployment inched above 4% for the first time in over two years.

The June jobs report, released Friday morning by the Bureau of Labor Statistics, showed somewhat hotter hiring than economists had expected, with analysts anticipating 200,000 nonfarm job gains. That still marked a slowdown since May, whose level was revised down — from 272,000 to 218,000.

April’s level was also revised sharply lower, showing 111,000 fewer jobs were added during those prior two months than earlier thought.

“The June rise in nonfarm payroll was slightly higher than expectations, but the big downward revisions to April and May are the story,” Kathy Jones, chief fixed income strategist at Charles Schwab, posted on X Friday. “Job market is slowing down.”

The U.S. labor market has for months defied long-running forecasts of a sharper pullback. Instead, prospects for workers have generally remained robust even as employers gradually slow down their hiring. But the latest numbers show that conditions are tightening.

Unemployment ticked up to 4.1% in June, unexpectedly cracking the historically low 4% rate that hadn’t been exceeded since November 2021.

Some of the strongest job gains last month were in government and healthcare, which added 70,000 and 49,000 roles, respectively. The “professional and business services” sector — a category that includes many tech roles — has been roughly flat throughout this year, the report said.

Workers’ pay continues to rise. Average hourly earnings were up 3.9% in June since the same month last year, still higher than before the pandemic — and still outpacing inflation — but at a slowing rate.

“Right now we’re seeing a job market that is experiencing what I like to call a modulated cooldown,” Nela Richardson, chief economist of payroll processor ADP, told reporters earlier this week. “It’s striking the right note at the right time.”

ADP’s own data on private-sector hiring showed Wednesday that just 150,000 roles were added in June, fewer than expected, driven largely by the leisure and hospitality industry. Other labor market indicators have pointed to steadily slowing growth after red-hot hiring boosted workers’ job prospects and pay during the recovery from the pandemic.

On Wednesday, however, the Labor Department reported initial claims for unemployment benefits continued to trend higher, while ongoing unemployment claims hit their highest level since November 2021.

“While firing rates remain low, if you do unfortunately lose your job it is becoming much harder to find a new position,” ING global financial group Chief Economist James Knightley said in a note to clients this week.

Beyond the labor market, the Institute for Supply Management reported this week what Knightley called a “truly awful” Purchasing Managers Index survey for June.

The figure dropped to 48.8 — below a forecast 52.7 and a significant drop from the 53.8 previous reading. A reading below 50 is considered a signal of contracting activity, and June was just the third time the index has shown a contraction in the past 49 months — but it was the second such occurrence in the past three.

“Survey respondents report that in general, business is flat or lower,” ISM survey committee chair Steve Miller in a statement.

With business activity slowing down, inflation is cooling, too. Last week, the Federal Reserve’s preferred gauge of price growth, the Personal Consumption Expenditures price index, climbed 2.6% from a year ago in May. That was the lowest annual rate since March 2021.

In remarks this week, Fed Chair Jerome Powell said risks to its inflation and employment goals “have come back much closer to balance.” In other words, the odds the Fed will not act aggressively enough to wrestle inflation back down to its 2% target are now closer to even with the odds that unemployment will increase as a result.

“The longer the Fed maintains its high interest rate strategy, the greater the risk that it throttles the economy back too far,” Moody’s Chief Economist Mark Zandi told NBC News ahead of the new BLS data on Friday. “We’re starting to see higher claims and layoffs and job market pullbacks. That’s an increasing concern.”