June Job Numbers Bode Well For Future Interest Rate Cuts

Anyone who, like the Federal Reserve, has been looking for continued good news that might indicate a future of falling interest rates should be heartened by June’s job numbers.

The number of new jobs was 206,000, only slightly above the 200,000 predicted by economists Dow Jones polled. That compares to the originally announced 272,000 for May. Also, the unemployment rate, estimated at 4.0%, came in at 4.1%.

Additionally, there was a downward revision of previous estimates in April (-57,000) and May (-54,000) for a negative total of 111,000. As the Council of Economic Advisors tweeted, the average three-month payroll gain ending in March, was 177,000. Close to a third of June’s jobs were government-related.

“The immediate reaction in Treasury yields to the 4.1 % unemployment rate — both the policy sensitive 2-year and the 10-year Treasury yields edging lower — suggests an economic landscape that continues to slow down at a faster pace,” said LPL Financial Chief Global Strategist Quincy Krosby in an emailed note.

But while a general economic cooling of the economy was necessary for a so-called soft-landing — where inflation falls without a recession — the slowing labor market might have broader implications. “The increase in the unemployment rate, especially for those with at least a Bachelor’s degree, suggests a modest cooling of the labor market,” Krosby wrote. “So far, we don’t see apocalyptic signs within the labor market, but investors should be wary when the labor market is supported by government payrolls.”

“Federal Reserve officials have become increasingly focused on the downside risks to the labor market,” Oxford Economics wrote. They thought that the June data added weight to a prediction that the Federal Reserve would “cut rates in September and at every other meeting thereafter.”

Which hasn’t been the Fed’s projection. “The last [inflation] reading and the one before it to a lesser, lesser extent, suggest that we are getting back on the disinflationary path,” said Chair Jerome Powell, according to a CNBC report. “We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy.”

The risk is that unemployment could rise and wages —up year-over-year in June by 3.9% — could slow more, putting additional households into financial stress. Consumer spending comprises about 69% of GDP, credit card debt remains at roughly historical levels, and the extra savings people acquired from government stimulus plans during the pandemic are largely gone.

If consumers cannot continue spending more, the risk of an economy tipping over into recession becomes higher, which might increase the chance of rate increases. That would seem good news for CRE borrowers, however, if the economy stumbles, the ability for people and companies to lease space and pay rents could be encumbered.