By Harriet Torry

The U.S. economy added fewer jobs than expected in June, cooling from a strong spurt this spring.

American employers added 57,000 new jobs last month, the Labor Department said Thursday, missing economists' expectations for a gain of 115,000 jobs.

That prompted investors to dial back their expectations for interest-rate increases by the Federal Reserve this summer.

Still, the job market appears to be on firmer footing than it was in the second part of last year. The economy added, on average, 92,000 jobs a month over the first half of this year. In the final six months of last year it shed 8,000 jobs each month, on average.

A smaller workforce

The unemployment rate ticked down unexpectedly to 4.2%, as more people left the labor force.

The share of the working-age population that is either working or looking for work — known as the labor-force participation rate — edged down to 61.5% in June, the lowest since March 2021.

The labor force is smaller than a year ago, likely reflecting more hard-line immigration policies and baby-boomer retirements. The size of the labor force declined by 720,000 from May to June.

"There were fewer people in the jobs market and fewer people getting jobs: That's a bad combination," said U.S. Bank chief economist Beth Ann Bovino.

Revisions

Thursday's report showed job growth in May and April was weaker than previously thought. Employment in April and May combined was 74,000 lower than earlier reported.

Industries that gained and lost jobs

The healthcare and social assistance sector drove job gains last month, adding nearly 47,000 jobs. Hiring in the leisure and hospitality sector declined by 61,000 in June, which the Labor Department said reflected "weaker than usual seasonal hiring." That bucked expectations for an increase in hiring due to the World Cup soccer tournament.

Some economists thought seasonal adjustment hiccups might play a role in the June decline, which came off a strong May for hiring at bars, restaurants and hotels in the run-up to the World Cup.

"Some of this may be payback after earlier strength, but it also raises a broader concern: lower-income consumers may be pulling back, and service employers may be less confident about summer demand," Sung Won Sohn, a professor of finance and economics at Loyola Marymount University, said in a note.

Manufacturing and construction employment both increased, likely reflecting the artificial intelligence data center build-out. But employment declined in information technology, which has been hard-hit by AI adoption. The information sector has cut jobs nearly every month since the start of last year.

Wages

Wage growth was relatively muted in June. Average hourly earnings increased 3.5% from a year earlier, in line with expectations. With year-over-year inflation at a three-year high of 4.2% in May, earnings haven't been keeping up with price increases, a pain point for consumers.

Taken together, the wage and payroll data point to a jobs market that isn't running so hot as to raise concerns about the labor market spurring inflation.

What this means for the Fed

The Thursday report does little to clarify the economic outlook for the Federal Reserve.

Fed hawks will read the six-month trend and Thursday's falling jobless rate as a labor market in good shape, consistent with their view that the Fed should focus more on inflation and perhaps prepare for raising rates.

The bigger question is whether Thursday's report is strong enough to pull anyone toward a rate increase who wasn't already leaning that way. Interest-rate futures markets said the answer is no: They put the odds of a July hike at roughly one in six, down from about one in three before the report, according to CME Group.

The context

Halfway through 2026, the U.S. economy is continuing to hum thanks to solid consumer spending and strong business investment in AI.

Hiring has stabilized in recent months after a weak patch during the fall and winter.

"The jobs data's been moving in a good direction," Kevin Warsh said last month at his first news conference as Federal Reserve chairman, after officials held interest rates steady.

Gasoline prices

Even so, inflation has picked up because of the conflict in Iran. That has eaten into wage gains and weighed on consumer sentiment. Measures of consumer confidence rose slightly in June on lower gasoline prices, but households continue to feel stressed about the cost of living and the labor market. The Conference Board said Tuesday that the percentage of consumers saying jobs were "hard to get" rose to the highest level last month since January 2021.

Gasoline prices, which spiked after the start of the Iran war, have eased in recent weeks, although they remain above their year-ago levels.

  • Photo by Justin Sullivan/Getty Images

Write to Harriet Torry at harriet.torry@wsj.com