The job market is cooling but still surprisingly strong. Is that a good thing?

Scott Horsley

July 07, 2023 / 12:22 pm

caption: A 'Now Hiring' sign is displayed outside a check cashing shop in Los Angeles on June 2, 2023. Employers added 209,000 jobs last month, slowing down from previous months but still marking respectable growth.

The country's job market is finally showing signs of cooling – but it may still be a tad too strong.

That may sound strange. In a traditional economy, a strong labor market would usually be a good thing, but it's not so positive in an economy that continues to struggle with high inflation.

U.S. employers added 209,000 jobs in June, according to data out on Friday. That's below the pace of recent months but it's still a very solid number.

And the overall labor market remains tight, with the unemployment falling to 3.6%, low by historic standards. Meanwhile, wages also continue to rise, increasing at an annual rate of 4.4%.

Here are some key takeaways from the Labor Department's June jobs report:

The jobs engine is shifting down

It may be a slowdown, but any month when the U.S. economy adds more than 200,000 jobs is a solid gain.

In fact, the economy may need the labor market to slow down further to help bring down inflation.

There are some signs that's happening. June's employment increase was the smallest since December 2020.

Job gains for April and May were also revised down by a total of 110,000 jobs.

In the first six months of this year, monthly job growth averaged 278,000 jobs — a significant downshift from the previous six months when employers were adding an average of 354,000 jobs every month.

But all in all, this is still a strong jobs market.

Why the labor market is still so solid

The resilience of the job market has surprised many economists given that the Federal Reserve had been raising interest rates aggressively to slow down the economy and bring down inflation.

But people continue to spend, especially on activities like eating out or traveling on vacation.

In fact, people are spending about twice as much money on services as they do on goods, and lately that gap has widened.

Spending on services rose 0.4% in May while spending on goods fell by 0.5%.

Employers pay attention to those spending patterns when deciding whether to hire more workers — and it was reflected in June's jobs data.

Service industries such as health care and hospitality continued to add jobs last month, the data showed, but goods-oriented industries such as retail and warehousing have been cutting workers.

The unemployment rate remains at historic lows

There was another sign of just how tight the labor market remains: The unemployment rate dipped to 3.6% in June from 3.7% the month before.

The unemployment rate has been under 4% for 17 months in a row — the longest such stretch since the 1970s.

The jobless rate has remained low even as more workers have entered the workforce.

The share of working-age (25-54 year old) men in the job market rose to 89.2% in June — matching the highest level since February 2020. Meanwhile, the share of working-age women in the job market hit a record high of 77.8%.

Not everyone is reaping the benefits of the tight job market, however.

The unemployment rate for African Americans, which fell to a record low of 4.7% in April, has risen in each of the last two months, reaching 6% in June.

Here's more good news for workers: Wages are climbing

With solid job growth and low unemployment, employers are having to compete for workers with higher wages.

Average wages in June were 4.4% higher than a year ago. That matches the annual pay hikes in April and May.

Wages are not rising as fast as they did last year, but the good news is, neither are prices.

Annual wage gains in May outpaced price hikes, so workers' real buying power increased. (Inflation figures for June will be released next week.)

But a solid jobs market makes things harder for the Fed

Rising wages are good for workers, but the Federal Reserve is worried that if paychecks increase too rapidly, it could put upward pressure on inflation — especially in service industries where wages are one of employers' biggest expenses.

The Fed held interest rates steady at its last meeting in June, but signaled that might be just a pause and suggested that rates would likely need to continue rising to bring down inflation.

Now, with another month of solid job growth and rising wages, markets expect the Fed to raise interest rates by another quarter percentage point when policymakers meet later this month.