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U.S. job growth was unexpectedly solid in June, but nearly half of the increase in nonfarm payrolls came from the government sector, with private industry gains the smallest in eight months as businesses battled rising economic headwinds. Â
While the Labor Department’s closely watched employment report on Thursday also showed the unemployment rate falling to 4.1% last month from 4.2% in May, that was in part because some people left the labor force. The average workweek was shorter last month, suggesting businesses were probably reducing hours.
Economists say President Donald Trump’s focus on what they call anti-growth policies, including sweeping tariffs on imported goods, mass deportations of migrants and sharp government spending cuts, has changed the public’s perceptions of the economy. Business and consumer sentiment surged in the wake of Trump’s victory in the presidential election last November in anticipation of tax cuts and a less stringent regulatory environment before slumping about two months later.
The mixed report is, however, unlikely to encourage the Federal Reserve to resume cutting interest rates this month, but raises the prospects of bigger reductions when the U.S. central bank restarts its monetary policy easing cycle.
“Although the overall number of jobs was very strong, the weakness was broad-based across the private sector,” said Eugenio Aleman, chief economist at Raymond James. “The labor market continued to weaken in June, which is in line with our view and should reignite the conversation regarding the Federal Reserve’s interest rate path.”
Nonfarm payrolls increased by 147,000 jobs last month after an upwardly revised 144,000 advance in May, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls rising 110,000 following a previously reported 139,000 gain in May.Â
The report was published a day early because of the Independence Day holiday on Friday. Despite the bigger-than-expected rise in payrolls, job growth is slowing and concentrated in a few industries.
Government employment rose by 73,000, boosted by a 40,000 increase in state government education, which economists brushed off as a seasonal quirk related to the end of the school year.
Local government education increased 23,000. A reversal was expected in July.
Federal government job losses continued amid efforts by the White House to slash headcount and spending, with 7,000 positions lost in May. Federal government employment is now down 69,000 since January.
Private payrolls increased by 74,000 jobs, the fewest since October 2024, after advancing 137,000 in May. The rise was below the three-month average gain of 115,000.
The healthcare sector continued to dominate employment growth, adding 39,000 jobs spread across hospitals and nursing and residential care facilities. Social assistance employment increased by 19,000. Outside these non-cyclical sectors, weakness prevailed.Â
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Manufacturing shed 7,000 jobs, while wholesale trade lost 6,600 positions, likely because of import duties. Professional and business services payrolls decreased 7,000. Retailers added a paltry 2,400 jobs. Transportation and warehousing payrolls increased 7,500, while construction payrolls advanced 15,000.
A measure of the share of industries reporting job growth decreased to 49.6 from 51.8 in May. The workweek shortened to 34.2 hours from 34.3 hours in May.
“The private sector was clearly losing momentum in the latter part of the second quarter, which does not augur well for the performance of the economy in the third quarter,” said Brian Bethune, an economics professor at Boston College.
Fed On Hold
The pace of wage growth has also slowed. Average hourly earnings rose 0.2% after rising 0.4% in May. That lowered the annual increase in wages to 3.7% from 3.8% in May.
Economists continued to expect that the Fed would not start cutting rates until September or even later.
“For the Fed, the softening in private activity is not so abrupt to lead the FOMC to drop its vigilance toward inflation risks, and we continue to look for the next ease in December,” said Michael Feroli, chief economist at J.P. Morgan.
The Fed last month left its benchmark overnight interest rate in the 4.25%-4.50% range, where it has been since December. Fed Chair Jerome Powell on Tuesday reiterated the central bank’s plans to “wait and learn more” about the impact of tariffs on inflation before lowering borrowing costs again.
Stocks on Wall Street traded higher. The dollar advanced against a basket of currencies. U.S. Treasury yields rose.
The decline in the unemployment rate came as 130,000 people dropped out of the labor force. Household employment also increased by 93,000, contributing to pulling the jobless rate down. Discouraged jobseekers jumped 256,000. Economists had expected the unemployment rate to tick up to 4.3%.
Still, long-term unemployment is rising, underscoring the sluggish hiring. The number of people out of work for 27 weeks and longer increased 190,000 to 1.647 million.
That aligns with an elevated number of people receiving unemployment checks. The median duration of unemployment rose to 10.1 weeks from 9.5 weeks in May.
Surveys show businesses reluctant to add to headcount. Some respondents in an Institute for Supply Management survey in June said they were “not hiring new staff if we can backfill the role with current employees” while others reported “the administration’s proposed budget for fiscal year 2026 has put a pause on many pending hiring actions.”
Most economists expect the jobless rate will rise in the second half of this year. Some economists, however, see limited scope as the immigration crackdown shrinks the labor pool.
With the administration having revoked the temporary legal status of hundreds of thousands of migrants, they argued fewer than 100,000 additional jobs per month would likely be needed to keep the jobless rate stable. They estimated the economy currently needs to create 100,000-170,000 per month to keep up with growth in the working age population.
The participation rate dropped to 62.3% from 62.4% in May. There were decreases among both foreign- and native-born populations.
“Some of the decline in participation could reflect changes in immigration policy and could continue,” said Andrew Hollenhorst, chief U.S. economist at Citigroup. “But signs of weakness in hiring in both household and establishment surveys keep us thinking the unemployment rate will rise later this year – perhaps now by larger steps in July and August.”
(Reporting by Lucia Mutikani; Editing by Paul Simao and Andrea Ricci)
