U.S. employers added 209,000 jobs in June and the unemployment rate edged down to 3.6%, a Labor Department report Friday showed, providing fresh evidence that hiring is moderating from its extraordinary post-pandemic pace without yet producing the broad labor-market deterioration policymakers have been watching for.

The Bureau of Labor Statistics’ July 7 Employment Situation showed payroll growth below the average of 278,000 jobs per month recorded during the first half of 2023 and well below the 399,000 monthly average for 2022. Yet the unemployment rate remains near multi-decade lows, and average hourly earnings rose 0.4% in June and 4.4% over the previous 12 months, leaving wage growth stronger than Federal Reserve officials would likely consider consistent with a rapid return of inflation to their 2% objective.

Payroll growth slows, but the labor market is still expanding

June’s 209,000 payroll gain was the smallest monthly increase since late 2020, but it remains a historically solid number for an economy that has already recovered the jobs lost during the pandemic shock. Government employment rose by 60,000, health care added 41,000, social assistance gained 24,000 and construction increased by 23,000. Employment changed little in many other major industries, including manufacturing, retail, transportation and warehousing, information and financial activities.

The report also revised earlier estimates lower. April payroll growth was reduced by 77,000 jobs, from 294,000 to 217,000, and May was revised down by 33,000, from 339,000 to 306,000. Together, the revisions removed 110,000 jobs from the prior two months. Revisions are routine as more employer survey responses arrive, but the direction matters because it reinforces the picture of a labor market that is cooling gradually rather than accelerating.

The household survey sent a somewhat firmer signal. The number of unemployed people declined and the unemployment rate moved from 3.7% in May to 3.6% in June. Labor-force participation held at 62.6%, essentially unchanged for several months and still below its level immediately before the pandemic. The employment-population ratio was 60.3%.

Openings are falling, but remain unusually high

Other data released this week show the same mixture of cooling and continued tightness. BLS reported Thursday that job openings declined to 9.8 million on the last business day of May, down by about 496,000 from April. The agency’s Job Openings and Labor Turnover Survey also showed 6.2 million hires, 5.9 million total separations, 4.0 million quits and 1.6 million layoffs and discharges.

The decline in vacancies is important because Federal Reserve officials have repeatedly pointed to the unusually large number of openings relative to available workers as evidence of labor-market imbalance. Fewer openings could reduce pressure on wages without requiring a sharp rise in unemployment. But 9.8 million vacancies remain elevated by pre-pandemic standards, and the quits rate — often viewed as a measure of workers’ confidence in finding another job — has not collapsed.

Private payroll data released a day before the government jobs report appeared much stronger. ADP reported that private-sector employment increased by 497,000 in June and that annual pay for job stayers rose 6.4%. The company’s National Employment Report, based on anonymized payroll data, said consumer-facing service industries led the increase, with leisure and hospitality adding 232,000 jobs.

The sharp difference between ADP’s estimate and the BLS payroll figure is a reminder that the two reports use different data and methodologies and should not be expected to match month by month. Contemporary coverage of the ADP release emphasized how dramatically it exceeded economists’ expectations, briefly intensifying concern that the labor market might be too strong for inflation to continue easing quickly.

The Federal Reserve’s next decision becomes more complicated

The employment report arrives three weeks after the Federal Reserve left its policy rate unchanged following 10 consecutive increases. In its June 14 policy statement, the Federal Open Market Committee held the federal funds target range at 5% to 5.25% while saying that maintaining the range would allow officials to assess additional information and its implications for monetary policy.

That pause did not mean the tightening cycle was necessarily finished. The Fed’s June economic projections showed a median year-end federal funds rate of 5.6%, implying that most officials expected additional increases if the economy evolved broadly as anticipated. The same projections put the median unemployment rate at 4.1% for the fourth quarter of 2023, above June’s 3.6% reading.

Friday’s jobs figures give policymakers evidence on both sides of the argument. Payroll growth is slowing and prior months have been revised down, suggesting higher interest rates are restraining demand. But unemployment remains very low and wage growth is still robust. If inflation data also remain firm, the labor market may give the Fed room to raise rates again without immediately threatening a recession.

Wages may be the most important number in the report

The 4.4% year-over-year increase in average hourly earnings is likely to receive as much attention as the headline payroll figure. Wage growth is not itself inflation, and stronger pay can be absorbed by productivity gains or lower profit margins. But persistent wage increases can support household spending and keep labor-intensive service prices under pressure when businesses face higher compensation costs.

Average hourly earnings rose 12 cents in June to $33.58. For production and nonsupervisory employees, the increase was also 0.4% over the month. The average workweek for private nonfarm employees edged up to 34.4 hours. Those details reinforce the view that employers are not responding to tighter financial conditions with a large reduction in labor demand.

At the same time, the composition of job growth is becoming narrower. Government, health care, social assistance and construction accounted for much of June’s increase, while several cyclical sectors were flat. That concentration bears watching because a labor market can weaken beneath a positive headline if fewer industries are contributing to growth.

A slower expansion is not yet a weak one

The June report is best read as evidence of deceleration rather than contraction. Employers are adding fewer jobs than they did last year, job openings have fallen from their peaks and revisions have reduced the apparent strength of spring hiring. Yet unemployment is 3.6%, layoffs remain comparatively low and employers still report millions more openings than there are unemployed workers.

That combination is central to the economic debate. The Federal Reserve is trying to bring inflation down without producing a severe rise in unemployment. A gradual cooling in hiring, vacancies and wage growth would be consistent with that objective; a sudden jump in layoffs would not. June’s data remain closer to the first scenario, although one month cannot establish a durable trend.

Markets and policymakers will now turn to next week’s inflation reports and the Fed’s late-July meeting. The June employment data remove some of the heat from the headline pace of hiring, but they do not deliver a clearly weak labor market. For workers, the economy is still generating jobs and wages are still rising. For the Fed, that resilience may be both encouraging and inconvenient: it improves the odds that tighter policy can be absorbed, while also leaving open the possibility that more tightening will be needed.