US jobs report is consistent with a soft landing

Today’s jobs report is broadly consistent with the soft landing narrative. Monthly payrolls growth weakened slightly in June, and there were downward revisions to previous months, but overall, the numbers remained fairly solid, and wage growth softened in line with expectations. The one fly in the ointment was an unexpected increase in the unemployment rate to 4.1%, which may prompt a twinge of concern about the direction of the U.S. economy. For the Federal Reserve, today’s report firms up the case for a September cut.

Report details

• Total non-farm payrolls increased by 206,000 in June, down from 218,000 last month, which itself was downwardly revised from 272,000. In fact, downward revisions to the previous two months' jobs reports subtracted 111,000 jobs from original estimates.
• Today’s payrolls number was a slight upside surprise. Notably, although the three-month moving average has dropped to 177,000, it remains above the 150,000 threshold which, pre-COVID, would have been considered consistent with a robust U.S. economy.
• The more significant surprise was the increase in the unemployment rate from 4.0% to 4.1%—the highest level since 2021. Although the rise resulted from an increase in labor participation rather than a drop in jobs, it will not go unnoticed that the Sahm recession rule is close to being triggered. (The Sahm rule states that historically, a 0.5% increase in three-month average unemployment over 12 months indicates that recession has begun.) It's worth noting, however, that most recession predictors have been triggered at some point in the past two years and have all been incorrect.
• Monthly average hourly earnings growth dipped from 0.4% in May to 0.3% in June, which was in line with expectations. This brought the annual growth rate down from 4.1% to 3.9%.

Policy outlook

The jobs report shows that the labor market is returning to balance and wage growth is moderating in response, falling back in line with most other labor market indicators that have been softening in recent months. While this is good news for the Fed regarding price pressures, the central bank will also be alert to the risk that the unemployment rate starts to rise more rapidly from here. A September rate cut is looking increasingly likely.

Principal Asset Management