The rise in the unemployment rate in June and a sharp downward revision to job gains for April and May are the latest signs that the economy may be slowing under the Federal Reserve’s high interest rates.
Figures released Friday by the Labor Department showed the unemployment rate rose to 4.1% in June from 4% in April, the third consecutive month of an increase of 0.1 percentage point.
The number of jobs added to the economy in May was revised down to 218,000 from 272,000, and April’s figure was revised down to 108,000 from 165,000.
Although initial estimates for June showed the economy added 206,000 jobs and the unemployment rate was low in absolute terms at 4.1%, the soft June employment report highlights the recent caution among the Fed’s interest rate setting committee about future risks to employment levels.
The Fed raised its benchmark interest rate to 5.25% to 5.5% last summer and has been keeping it there to help drive down inflation to its annual target of 2%. High interest rates are meant to fight inflation by sapping energy from the economy and forcing companies to stabilize prices.
“Several participants particularly emphasized that a further weakening in demand as the labor market normalizes could trigger a larger unemployment reaction than in recent years, when weakening labor demand has been felt more relatively through declining job openings,” according to the minutes of the Fed’s June Federal Open Market Committee meeting released this week.
In May, the number of job openings per unemployed person held steady at 1.25, down from a high of two job openings per job seeker in 2022.
Wage growth slowed in June, rising 10 cents to $35 an hour after rising 15 cents in May. On an annualized basis, wages rose 3.9% in June, still above the rate of inflation but down from 4.1% in May. Wage growth has generally been on a downward trend since reaching 5.9% in March 2022.
Wage growth for non-managerial employees fell at a faster pace, dropping from an annual increase of 7% for 2022 to 4% in June.
As wages and employment have cooled, so has inflation: The Consumer Price Index fell in both April and May but remains above the Fed’s 3.25% target range.
The ISM services sector payrolls report for June came in much weaker than expected, falling 5 percentage points below May’s figure.
“June’s service [levels] “This suggests the overall economy is shrinking for the first time in 17 months,” ISM’s Steve Miller said in an analysis.
The labor market slowdown may be linked to the fading effects of financial protections enacted by Congress in response to the pandemic, including the $800 billion in Paycheck Protection Program loans for small businesses.
The IRS still receives 17,000 Employee Retention Tax Credit claims each week, but a whistleblower told congressional tax staff earlier this year that 95 percent of them are fraudulent.
Democrats on Friday focused on job gains being created in the economy and levels of consumer confidence.
“Under President Biden, we saw another month of strong job growth,” Rep. Richard Neal (D-Mass.), the Ways and Means Committee’s ranking member, said in a statement.
Republicans argued that many of the new jobs were in the public sector, not the private sector.
“70,000 new government jobs were hired while 8,000 manufacturing jobs were eliminated. The new jobs should be the result of economic growth, not increased government spending,” said Ways and Means Chairman Jason Smith (R-Mo.).
There is a growing chorus among private economists that they are finally seeing signs that the economy is slowing after a long period of better-than-expected hiring and economic growth, and that it is time for the Fed to cut interest rates.
“It’s time for the Fed to cut interest rates,” Mark Zandi, chief economist at Moody’s Analytics, wrote on social media. “That’s the message of today’s June jobs report: Unemployment remains low but is rising steadily. Job and wage growth remains strong but is slowing steadily. The Fed has accomplished its full employment mandate.”
Ron Temple, chief market strategist at Lazard, agreed, saying, “Overall, the labor market is in great shape — neither too hot nor too cold — and does not justify such tight monetary policy.”
International economists have offered similar encouragement but said the Fed needs to see more signs that inflation is falling before cutting rates.
“Minutes from the Fed’s June meeting suggest the Fed wants more evidence that inflation is subsiding before cutting rates, which has some economists (including this one) growing frustrated. With harmonized inflation below 2% and deflation occurring in nearly every sector of the economy somewhere in the U.S., how much further slowdown is needed?,” UBS economist Paul Donovan wrote in an analysis on Thursday.
