Economic Data Analysis: Soft NFP while Jobless Claims are little changed

The June employment report was softer than expected, with nonfarm payrolls rising by 57k, below the 110k consensus and down from the prior 172k, although May was revised lower to 129k. April was also revised down by 31k to 148k, leaving the two-month net revision at -74k, a notable deterioration from the +93k net upward revisions seen in the previous report.

Going into the release, many analysts had expected the FIFA World Cup to continue supporting employment, with some desks estimating a boost of around 40k jobs. Instead, leisure and hospitality employment fell by 61k in June, reflecting weaker-than-usual seasonal hiring and largely reversing May's unusually strong 70k increase. Pantheon Macroeconomics argues the weakness is likely temporary, attributing it to the unwind of an unusually generous seasonal adjustment that boosted May payrolls. Outside of leisure and hospitality, employment continued to trend higher in professional and business services, social assistance and health care.

Private payrolls increased by just 49k, below the 115k consensus and down from 120k previously, while government payrolls rose by 8k after increasing 52k in May.

Elsewhere in the report, the unemployment rate declined to 4.2% from 4.3%, although the improvement was largely driven by a fall in the labour force participation rate to 61.5% from 61.8%, suggesting the lower unemployment rate overstated the underlying strength of the labour market. Wage growth was in line with expectations, with average hourly earnings rising 0.3% M/M and 3.5% Y/Y.

Despite the softer headline, payroll growth remains within the St. Louis Fed's estimated breakeven range of 15k-87k jobs per month, while Governor Waller suggested in April that employment growth around zero could be the labour market breakeven. As such, one softer report is unlikely to materially alter the Fed's policy outlook, particularly given inflation remains above target.

Pantheon Macroeconomics described the report as a "reality check", arguing that business surveys continue to point towards a weaker payroll trend in the second half of the year. The desk highlighted the sharp decline in hiring intentions within the NFIB survey, softer regional Fed surveys and continued weakness in the Indeed and LinkUp measures of job openings. Pantheon expects initial payroll estimates to average around 75k per month in H2 2026, which it believes could ultimately prove consistent with near-zero employment growth after revisions. The BLS's preliminary annual benchmark revisions are due on August 28th, 2026. 

From a policy perspective, one softer payroll report is unlikely to significantly reduce expectations for further Fed tightening. However, should this evolve into a broader trend of weaker employment growth, it would make additional rate hikes increasingly difficult to justify. With Chair Warsh having emphasised inflation over employment since taking office, markets will now be watching closely to see whether future Fed communication begins to place greater weight on signs of labour market cooling.

Initial jobless claims (w/e June 27th) were more-or-less unchanged at 215k (prev. 216k), and marginally beneath the expected 219k, which left the 4-wk average ticking lower to 222k from 224.5k. Unadjusted initial claims were expected at 213,550, +2.7% W/W, with seasonal factors expecting an increase of 6,048, +2.9%. Looking at the state breakdown, the biggest declines were in California (-5,884), Pennsylvania (-3,077), and Minnesota (-1,962), with the largest gains seen in New Jersey (+7,150), Connecticut (+2,563), New York (+1,595), and Illinois (+1,327). Oxford Economics highlight the data is consistent with the low and stable layoff rate that has defined the labor market in recent months. Meanwhile, the continued claims (w/e June 22nd), rose marginally to 1.814mln from 1.812mln, slightly above the 1.810mln forecast.