June payrolls miss by 57,000 as labor force shrinks to 61.5%

U.S. employers added just 57,000 jobs in June, less than half the 115,000 consensus, as the labor force participation rate slid to 61.5 percent — a 50-year low outside the pandemic — cooling bets on a July rate hike.

"Payrolls coming in well below expectations takes a July hike off the table, but the unemployment rate falling for the wrong reasons — fewer people looking for work — points to a labor market that's stubbornly refusing to reaccelerate," said Daniel Zhao, chief economist at Glassdoor.

The unemployment rate ticked down to 4.2 percent from 4.3 percent, but only because 720,000 people exited the workforce entirely, the Labor Department estimated. April's payrolls growth was revised down by 31,000, bringing combined revisions to a net minus 74,000. The two-year Treasury yield dropped 12 basis points to 4.13 percent, while the Dow Jones Industrial Average climbed to a fresh record above 52,750 points.

The soft print relieves immediate pressure on the Federal Reserve, with the odds of a July hike collapsing to roughly 20 percent from elevated levels. Markets now fully price the next move only by December, opening the door for a potential pivot if the labor market continues to cool. Fed Chair Kevin Warsh, in his first international appearance at the ECB Forum in Sintra, warned investors not to expect an accommodating central bank while inflation sits above 2 percent, though he acknowledged inflation expectations have "moderated" since his May 22 swearing-in.

A Million Workers Have Left the Workforce

Over the past year, about 1 million Americans have stopped working or looking for work, according to the Labor Department. The participation rate for workers 55 and older fell to 37.1 percent in June, a 21-year low, as a booming stock market encouraged retirement. But the decline extends beyond retirees: the participation rate for prime-age workers ages 25 to 54 has also fallen, puzzling economists.

"Somebody who became unemployed a year ago, when it was really hard to find a job, is likely still unemployed right now," said Nicole Bachaud, economist at ZipRecruiter. Employers may prefer to hire someone who recently left a job or is still working elsewhere, she said, leaving the long-term unemployed discouraged enough to stop searching.

Return-to-office mandates have also played a role, particularly for women and workers with disabilities. Jasmine Tucker, vice president of research at the National Women's Law Center, said high caregiving costs combined with in-person requirements have disproportionately driven women out of the labor force.

What the Data Means for the Fed

The sustained decline in labor supply could slow U.S. economic growth even if productivity remains healthy. "Economic growth is a combination of the economy generating more for each hour that workers are at the job and more workers working more hours," said Bill Adams, chief U.S. economist at Comerica Bank. "The first half — productivity — is still growing at a good pace, but the second half — bringing more workers into the economy — is not contributing as much as it has in the past."

The last time the participation rate was this low outside a pandemic was in the 1970s, when women were entering the workforce in record numbers. Today the dynamic is reversed: the U.S. is aging, and the workforce is shrinking. The Fed's next policy meeting is scheduled for July 29-30, and the CME FedWatch tool now implies a roughly 20 percent probability of a hike — down from over 50 percent before the jobs report.

This article is for informational purposes only and does not constitute investment advice.