June hiring slowdown clouds labor market outlook

U.S. hiring slowed sharply in June, undercutting hopes that the labor market was gaining speed heading into summer. Payrolls increased by 57,000, and revisions cut April and May job growth by a combined 74,000, making recent hiring look weaker than first reported.

The report also showed the unemployment rate falling to 4.2%, but several economists said that improvement came with a warning sign. Glassdoor Chief Economist Daniel Zhao said the drop was tied to labor force participation slipping to 61.5%, rather than a burst of new hiring.

Zhao said the report dampened the pre-holiday mood and suggested the labor market had lost momentum. He also pointed to annual wage growth of 3.5%, which he said remains firm enough to keep inflation concerns in play even as job creation cools.

Labor force decline draws concern

LPL Financial Chief Economist Jeffrey Roach said the participation decline means 2.5 million more people have left the labor force since last year. He said the number of Americans outside the labor force rose to 105.8 million, most likely because some people stopped looking for work.

Roach called that a concerning trend. In his view, companies are still adding workers, but they are also reducing hours, which he said remain below pre-pandemic levels.

The sector breakdown added to the uneven picture. Zhao said leisure and hospitality shed 61,000 jobs in June, with losses across accommodation, food services and related categories. He said the gains that did appear were concentrated in smaller areas, including temporary help and some local government jobs linked to event staffing.

Some economists expect revisions

Jamie Cox, managing partner at Harris Financial Group, questioned the leisure and hospitality decline. He said the data should be discounted and argued that the sector was unlikely to show a loss during the World Cup, predicting the figures would be revised higher in coming months.

Other analysts focused on the broader slowdown. Bradford Smith of Janus Henderson Investors described the payroll gain as weaker than expected and said June marked the lowest job-creation total since February. Smith said softer employment data, together with easing oil-price inflation, likely gives the Federal Reserve reason to keep rates unchanged at its next meeting.

Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the report showed a clear reversal from stronger earlier readings. He noted that June produced fewer jobs than expected and that prior months were revised downward.

Taken together, economists described a labor market that is still growing but at a more modest pace. The report gave policymakers less evidence of overheating, while raising fresh questions about whether weaker hiring and lower participation are becoming a broader pattern.

This story draws on original reporting from Fortune.