US job growth slows sharply in June; labor force participation rate at more than 5-year low

WASHINGTON - U.S. job growth slowed sharply in June and payroll gains for the prior two months were revised lower, pointing to a cooling labor market and prompting financial markets to dial back expectations for a near-term interest rate hike from the Federal Reserve.

While the Labor Department's closely watched employment report on Thursday showed the unemployment rate dropped to 4.2% last month from 4.3% in May, that was due to 720,000 people leaving the labor force, which pushed down the participation rate to the lowest level in more than five years.

Some economists said the bigger-than-expected slowdown in job growth was likely a delayed response to the Middle East conflict, which has raised gasoline prices and boosted inflation. They pointed to a 61,000 drop in leisure and hospitality payrolls, the largest since the pandemic, which the government said reflected "weaker than usual seasonal hiring."

Though gasoline prices have dropped below $4.00 a gallon amid a fragile ceasefire between the U.S. and Iran, prices at the pump remain above the national average retail price of $2.98 before the war started at the end of February. Economists said Americans could be eating out less as a result.

They generally viewed the labor market as remaining in a "low hire, low fire" state, and expected the U.S. central bank to stay focused on inflation.

"I would expect that most policymakers would continue to regard the labor market as stable and neither too hot nor too cold," said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. "There was a substantial knee-jerk reaction in financial markets, including scaling back the odds of rate hikes this year. I view the latter as an improper response."

Nonfarm payrolls increased by 57,000 jobs last month, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls advancing 110,000, with estimates ranging from as low as 25,000 to as high as 200,000.

The establishment survey also showed the economy created 74,000 fewer jobs in April and May than previously reported.

Still, employment gains averaged 111,000 per month in the second quarter, far more than the 34,000 during the same period last year. The report was released a day early due to Friday's public holiday marking the United States' 250th anniversary of independence on Saturday.

The moderation and downward revisions brought payrolls into alignment with other labor market surveys, including small business hiring plans, which have offered a less-robust picture of the jobs market.

Financial markets expected the U.S. central bank to keep monetary policy unchanged this month, and lowered the odds of a rate hike in September to about 60% from roughly 75% before the employment report.

The Fed last month left its benchmark overnight interest rate in the 3.50%-3.75% range, but updated quarterly projections showed policymakers expected to raise borrowing costs this year.