What labor market data says about the economy

New government data showed 206,000 jobs were added last month, but the unemployment rate rose above 4% for the first time in two years.

The June jobs report, released Friday morning by the Bureau of Labor Statistics, showed slightly stronger hiring than economists had expected, with analysts expecting 200,000 nonfarm jobs. That was still a slowdown from May, where the level was revised down — from 272,000 to 218,000.

The April level was also revised downwards significantly: 111,000 fewer jobs were added in the two previous months than previously thought.

“June nonfarm employment growth was slightly higher than expected, but the big downward revisions in April and May are the story,” Kathy Jones, chief fixed income strategist at Charles Schwab, posted on X on Friday. “The labor market is slowing.”

The U.S. labor market has for months defied longstanding predictions of a sharper downturn. Instead, the outlook for workers has remained broadly robust, even as employers gradually scale back hiring. But the latest numbers show conditions are tightening.

Unemployment rose to 4.1% in June, unexpectedly reaching a historically low rate of 4%, which had not been exceeded since November 2021.

Some of the strongest job gains last month were in government and health care, which added 70,000 and 49,000 jobs, respectively. The “professional and business services” sector — a category that includes many tech roles — has been about flat this year, the report said.

Workers’ wages continue to rise. Average hourly earnings rose 3.9% in June from the same month last year, still higher than before the pandemic — and still faster than inflation — but at a slowing pace.

“Right now we’re seeing a labor market that’s experiencing what I like to call a modulated slowdown,” Nela Richardson, chief economist at payroll processor ADP, told reporters earlier this week. “It’s striking the right tone at the right time.”

ADP’s own data on private-sector hiring showed Wednesday that just 150,000 positions were added in June, fewer than expected, driven largely by the leisure and hospitality sector. Other labor market indicators pointed to steadily slowing growth after red-hot hiring boosted job prospects and workers’ pay during the pandemic recovery.

However, on Wednesday, the Labor Department reported that initial jobless claims continued to rise, while ongoing claims for unemployment benefits reached their highest level since November 2021.

“While layoff rates remain low, it is becoming increasingly difficult to find a new job if you do lose your job,” James Knightley, chief economist for ING’s global financial group, said in a note to clients this week.

In addition to the labor market, the Institute for Supply Management this week reported what Knightley called a “truly terrible” Purchasing Managers Index survey for June.

The figure fell to 48.8 — below a forecast of 52.7 and a significant drop from the previous reading of 53.8. A reading below 50 is considered a signal of contracting activity, and June was only the third time the index has shown a contraction in the past 49 months — but it was the second time in the past three months that this has happened.

“Survey respondents indicate that things are generally stable or worse,” Steve Miller, chair of the ISM survey committee, said in a statement.

As business activity slows, inflation is also cooling. Last week, the Federal Reserve’s preferred measure of price growth, the Personal Consumption Expenditures price index, rose 2.6% from a year ago in May. That was the slowest annual rate since March 2021.

In remarks this week, Fed Chairman Jerome Powell said the risks to the inflation and employment targets are “much closer together.” In other words, the odds that the Fed will not act aggressively enough to bring inflation back to its 2% target are now nearly equal, while the odds that unemployment will rise as a result.

“The longer the Fed maintains its high-rate strategy, the greater the risk that it will push the economy too far back,” Moody’s Chief Economist Mark Zandi told NBC News ahead of the new BLS data on Friday. “We’re starting to see higher claims and layoffs and labor market withdrawals. That’s a growing concern.”