The U.S. Economy Added an Underwhelming 57,000 Jobs in June. Here's the Takeaway for Investors.

In a highly anticipated jobs report ahead of the July 4th holiday weekend, the U.S. economy added a seasonally adjusted 57,000 jobs in June, roughly half of what economists expected.

The unemployment rate fell to 4.2% and average hourly earnings rose 0.3% from the prior month, in line with estimates.

As of 12:44 p.m., the Dow Jones Industrial Average traded roughly 347 points higher, while both the S&P 500 Index and Nasdaq Composite were slightly in the red.

The report is a bit of a mixed bag. On one hand, it strays from the narrative suggesting the labor market has rebounded.

On the other hand, the soft data also gives the Federal Reserve more flexibility regarding the trajectory of interest rates.

Here’s the takeaway for investors.

Image source: Getty Images.

The bad news

On the negative side of the spectrum, the economy had been coming off three consecutive jobs reports showing solid gains.

Investors had been worried about the labor market, so the string of positive reports suggested that the economy may be on better footing.

Not only did the economy add far fewer jobs in June than expected, but the May jobs forecast got revised down to 129,000, indicating the picture hadn’t been as rosy as some had hoped.

Additionally, while the unemployment rate fell to 4.2%, the main driver was a decline in the labor force participation rate, which fell by 0.3% to 61.5%, the lowest level since March 2021.

This means the number of people working or actively seeking work declined, so it isn’t necessarily a good sign.

The good news

Due to high inflation, largely driven by the Iran war, the economy was getting to a point where it looked like the Fed may have no choice but to hike interest rates again.

This also put the economy in a position where bad news once again became good news.

A weaker labor market can suggest inflation will slow because demand is often driven by a healthy labor market, where people have disposable income to spend.

Additionally, this report gives the Fed added flexibility with interest rates, specifically the ability to continue holding them steady.

US Nonfarm Payrolls MoM data by YCharts

“For the Fed, this number is fine,” Jefferies Senior Economist Thomas Simons wrote in a research note, according to CNBC. “The pace of job growth is plenty strong enough to maintain a steady unemployment rate and average hourly earnings are solid, but not accelerating. There is no imperative on their part to do anything with rates immediately, and the softening in the pace of job growth suggests that rate hikes are very unlikely to be necessary this year.”

Yesterday, the market placed a roughly 36% chance on the Fed keeping rates steady at its September meeting. As of this writing, the likelihood of the Fed holding rates steady in September increased to over 46%.

Higher interest rates tend not to be as bullish for stocks. Ultimately, this is good news for the Fed, which likely wanted to avoid rate hikes if possible.

However, I don’t see this as an overly impactful report. The major indexes are most certainly being impacted by other factors on a day likely characterized by weak overall trading volume.

Inflation is still an issue, while the labor market remains a mystery.