Washington, July 2, 2026 – The U.S. labor market delivered a disappointing performance in June, with nonfarm payrolls increasing by a mere 57,000, significantly undershooting the 110,000 gain economists had anticipated in a Reuters poll. The unemployment rate edged down to 4.2% from 4.3%, but this improvement was overshadowed by a dramatic contraction in the labor force, which shrank by 720,000 individuals.
The Bureau of Labor Statistics reported that the leisure and hospitality sector was a major drag, shedding 61,000 jobs—a decline that surpassed the overall payroll increase. Excluding this sector, private payrolls would have risen by 118,000, closer to consensus estimates. The BLS attributed the weakness to "weaker than usual seasonal hiring" in leisure and hospitality.
Revisions to prior months also painted a softer picture. April and May payrolls were revised down by a net 74,000, with May's gain now at 129,000, down from the initially reported 172,000. The household survey showed employment fell by 507,000, while the number of people not in the labor force swelled by 832,000. The participation rate dropped to 61.5% from 61.8%.
Financial markets reacted swiftly to the data. As of 8:40 a.m. ET, Dow E-minis rose 0.40%, S&P 500 E-minis added 0.37%, and Nasdaq 100 E-minis climbed 0.58%. According to LSEG data via Reuters, the probability of at least one Federal Reserve rate hike this year fell to 75.6% from approximately 84% before the release. Investors interpreted the soft hiring as reducing the urgency for further monetary tightening.
Average hourly earnings rose 0.3% to $37.64, up 3.5% year-over-year, while the average workweek held steady at 34.3 hours. The aggregate weekly payrolls index increased 0.4%, suggesting wage growth remains moderate.
Private sector data from Automatic Data Processing (NASDAQ:ADP) confirmed the trend, with ADP reporting that private employers added 98,000 jobs in June and that pay jumped 4.4% from a year earlier. "For now, the overall effect is a slowdown in job creation," said Nela Richardson, ADP's chief economist.
Consumer confidence data also signaled a cooling labor market. The Conference Board's June confidence index rose slightly to 91.2, but its labor market differential—the gap between respondents saying jobs are plentiful versus hard to get—dropped to 2.4 points. About 22.5% of consumers reported that jobs were hard to find, the highest share since January 2021. "Perceptions of the current labor market softened measurably," noted Dana Peterson, chief economist at the Conference Board.
The JOLTS report released Tuesday added to the mixed picture. Job openings climbed to 7.594 million in May, but hiring declined for a second consecutive month. "The labor market continues to show signs of stabilization," said Matthew Martin, senior U.S. economist at Oxford Economics. However, Samuel Tombs at Pantheon Macroeconomics cautioned that the JOLTS response rate had dropped, raising "the potential for non-response bias."
Looking ahead, the Federal Reserve appears to be in a wait-and-see mode. Kay Haigh at Goldman Sachs Group (NYSE:GS) Asset Management noted that "a path for the Fed to stay on hold for the rest of the year" remains possible, but warned that surprise inflation could still trigger a rate hike. Barclays (LON:BARC) Private Bank's Julien Lafargue emphasized that markets are more focused on the June Consumer Price Index, due July 14, as a clearer indicator of economic direction. The next jobs report is scheduled for August 7, with the BLS set to release its preliminary payroll benchmark revision estimate on August 28.
