State and local government hiring wins the day State and local government hiring wins the day http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\city-hall-building-small.jpg July 1 2025 July 3 2025

State and local government hiring wins the day

The strong labor report for June likely keeps the Fed on pause in July.

Published July 3 2025
My Content

Bottom line

The US labor market was surprisingly strong across the board in June. The Labor Department reported today that nonfarm payrolls rose in June due in large part to the biggest gain in state and local payrolls in more than two years. Household employment enjoyed a powerful rebound, with a gain of 93,000 jobs in June from a loss of nearly 700,000 jobs in May. In addition, the unemployment rate fell to 4.1% in June (consensus expectations for an increase to 4.3%), while wage inflation slipped a tick to an annual rate of 3.7%. Both of these moves were certainly surprising.

Headline nonfarm payrolls rose by a higher-than-anticipated 147,000 jobs in June (consensus at 106,000, Federated Hermes at 121,000), as a surge in public education hiring offset a decline in private job creation. April and May results were revised up by a combined 16,000 jobs, which boosts June’s gain to an adjusted increase of 163,000 jobs, compared with gains of 144,000 in May and 158,000 in April.

But private payrolls posted a weaker-than-expected increase of only 74,000 jobs in June (consensus at 100,000), compared with gains of 137,000 in May and 133,000 in April. With the combined downward revision of 16,000 jobs in April and May, June’s adjusted private payroll gain is only 58,000 jobs. That’s consistent with ADP’s disappointing private hiring survey in June, which lost 33,000 jobs, its worst month in more than two years.

Immigration shifts may be contributing to weakness The participation rate for foreign-born workers declined from 67.0% in June 2024 to 66.3% last month, while the number not in the labor force rose 4.3% over the past year. Immigrant labor participation had been rising strongly over the past few years. In contrast, the native-born participation rate eased from 62.1% in June 2024 to 61.8% last month, while the number of native-born workers not in the labor force increased by only 2.5%. These trends are much improved from recent years, which suggests the recent crackdown on immigrant labor is orchestrating a shift in the labor pool. However, to achieve a longer-term economic goal of sustainable 3% GDP growth, the US must expand legal immigration to supplement the dearth of native-born workers in industries such as agriculture, hospitality, construction, factory work, and child- and elder-care.

Impact of DOGE layoffs Federal government payrolls have collectively declined by 69,000 jobs over the past five months through June. But according to Challenger, Gray & Christmas, the Trump administration has reduced government payrolls by some 289,000 federal workers over the past six months. Employees who are on paid leave or receiving severance are still counted as employed, and some workers may have already found new jobs in private industry. Bloomberg expects at least a half million US. jobs could be impacted, when counting universities, contractors and others who rely on government funding.

July likely off the table for the Fed This morning’s report suggests that the labor market is relatively solid, particularly as the unemployment rate declined to 4.1%. The Federal Reserve’s June SEP update forecasts it will rise to 4.5% by year-end. Moreover, wage inflation (as measured by average hourly earnings) rose by a better-than-expected, 11-month low of 3.7% year-over-year (y/y). The Fed expects inflation to soar in coming months, due to President Trump’s ongoing trade negotiations and fiscal policy legislation. Consequently, it’s unlikely that the Fed will cut interest rates at its policy-setting meeting on July 30. The Fed has said it will take a deep dive into labor-market dynamics at its annual Jackson Hole monetary policy summit on August 21-23. That could set the table for a quarter-point cut in each of the FOMC meetings on September 17 and December 10.

Other key labor-market indicators were mixed:

  • ADP private payroll survey This monthly survey was the worst in more than two years. It showed a loss of 33,000 jobs, well below consensus for a gain of 98,000. The firm revised May’s figure down from a gain of 37,000 jobs to an increase of 29,000. Workers who changed jobs last month saw their wages rise by 6.8% y/y, less than half the cycle peak of 16.1% in April 2022. Job stayers earned a more modest 4.4% y/y raise, well below the peak of 7.8% in September 2022.
  • Initial weekly jobless claims This high-frequency leading employment indicator soared to an eight-month high of 250,000 for the week ended June 6. But claims have dropped by nearly 7% to 233,000 over the past three weeks.
  • Challenger, Gray & Christmas layoffs Employers announced that layoffs of almost 48,000 in June were 1.6% lower than a year ago and 48.9% below May’s 93,800. Consumer products companies accounted for nearly 20%.
  • Job Openings & Labor Turnover Survey (JOLTS) May job openings surprisingly surged by 5.1% month-over-month (m/m) to 7.769 million. That’s up from nearly 7.4 million in April, but still 36% below a record 12.182 million in March 2022. The rate of openings leapt to 4.6% in May from the six-month low of 4.3% in March; but it remains well below the record 7.4% in March 2022. The ratio of available job openings for every unemployed worker rose to 1.1 in May from a four-year low of 1.0 last March, also down sharply from a peak of 2.0 in March of 2022.

Unemployment, labor impairment and participation rates all decline Household employment (an important leading employment indicator) rebounded to a gain of 93,000 jobs in June, up from an 18-month low of a loss of 696,000 workers in May, compared with robust gains of 461,000 workers in April and 201,000 in March. June’s unemployment rated (U-3) of 4.1% is lower than the 4.2% rate in each of the previous three months. It is also below July 2024’s three-year high of 4.3%, but still well above April 2023’s 53-year low of 3.4%. The Fed expects U-3 to rise to 4.5% by year end. The labor impairment rate (U-6) eased to 7.7% in June, down from 7.8% in May, 7.9% in March and 8.0% in February, which was its highest reading since 2021, but still well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate surprisingly dropped to a more than two-year low 62.3% in June from a seven-month high of 62.6% in April, likely due to a decline in immigrant labor. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020.

Wage inflation and hours worked decline Average hourly earnings rose a better-than-expected 0.2% m/m gain in June, half of May’s 0.4% m/m gain. Wage growth declined to a slower-than-expected 3.7% y/y pace (consensus at 3.8%) in June, down from 3.8% in May and 3.9% in March. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked eased to a below consensus 34.2 in June, down from 34.3 in each of the three previous months. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to change a worker’s hours before they alter their staff size.

K-shaped recovery gap widens The rate of unemployment for highly educated workers declined to 2.5% in June from 2.6% in May, but still up from September 2022’s cycle low of 1.8%. The rate of unemployment for less-educated workers leapt to 5.8% in June, up from 5.5% in May and well above its 31-year low of 4.4% in November 2022.

Sector details mixed:

  • Temporary help (an important leading employment indicator) lost a modest 3,000 jobs in June for the fifth time in six months, after losing 6,000 jobs in May. This sector has lost jobs in 35 of the past 38 months.
  • Manufacturing lost a worse-than-expected 7,000 jobs in June (consensus at a loss of 2,000 jobs), compared with a loss of 7,000 jobs in May and a breakeven April. This sector has been breakeven or lost jobs in four of the past six months, but we’re expecting manufacturing hiring to strengthen in coming months.
  • Construction added 15,000 jobs in June, after adding 6,000 jobs in May. The sector’s hiring was breakeven in April. In the aftermath of last year’s hurricanes and the wildfires, we expected construction to accelerate in the spring and summer from demand for rebuilding.
  • Retail added 2,000 jobs in June, after losing 7,000 jobs in May. “Marpril” spending was strong, and the sector added 5,000 jobs in April and 16,000 in March. The important Back-to-School season started last month.
  • Leisure & hospitality hired a lackluster 20,000 jobs in June, after adding 29,000 in May, 18,000 in April and 45,000 in March. This recent deceleration may be related to the decline in immigrant participation.
Tags Markets/Economy . Equity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Institute of Supply Management (ISM) nonmanufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. Past performance is not a reliable indicator of future results. 

This is a marketing communication. The views and opinions contained herein are as of the date indicated above, are those of author(s) noted above, and may not necessarily represent views expressed or reflected in other communications, strategies or products. These views are as of the date indicated above and are subject to change based on market conditions and other factors. The information herein is believed to be reliable, but Federated Hermes and its subsidiaries do not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. This document has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. 

This document is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities, related financial instruments or advisory services. Figures, unless otherwise indicated, are sourced from Federated Hermes. Federated Hermes has attempted to ensure the accuracy of the data it is reporting, however, it makes no representations or warranties, expressed or implied, as to the accuracy or completeness of the information reported. The data contained in this document is for informational purposes only, and should not be relied upon to make investment decisions. 

Federated Hermes shall not be liable for any loss or damage resulting from the use of any information contained on this document. This document is not investment research and is available to any investment firm wishing to receive it. The distribution of the information contained in this document in certain jurisdictions may be restricted and, accordingly, persons into whose possession this document comes are required to make themselves aware of and to observe such restrictions. 

United Kingdom: For Professional investors only. Distributed in the UK by Hermes Investment Management Limited (“HIML”) which is authorised and regulated by the Financial Conduct Authority. Registered address: Sixth Floor, 150 Cheapside, London EC2V 6ET. HIML is also a registered investment adviser with the United States Securities and Exchange Commission (“SEC”).

European Union: For Professional investors only. Distributed in the EU by Hermes Fund Managers Ireland Limited which is authorised and regulated by the Central Bank of Ireland. Registered address: 7/8 Upper Mount Street, Dublin 2, Ireland, DO2 FT59. 

Australia: This document is for Wholesale Investors only. Distributed by Federated Investors Australia Services Ltd. ACN 161 230 637 (FIAS). HIML does not hold an Australian financial services licence (AFS licence) under the Corporations Act 2001 (Cth) ("Corporations Act"). HIML operates under the relevant class order relief from the Australian Securities and Investments Commission (ASIC) while FIAS holds an AFS licence (Licence Number - 433831).

Japan: This document is for Professional Investors only. Distributed in Japan by Federated Hermes Japan Ltd which is registered as a Financial Instruments Business Operator in Japan (Registration Number: Director General of the Kanto Local Finance Bureau (Kinsho) No. 3327), and conducting the Investment Advisory and Agency Business as defined in Article 28 (3) of the Financial Instruments and Exchange Act (“FIEA”). 

Singapore: This document is for Accredited and Institutional Investors only. Distributed in Singapore by Hermes GPE (Singapore) Pte. Ltd (“HGPE Singapore”). HGPE Singapore is regulated by the Monetary Authority of Singapore. 

United States: This information is being provided by Federated Hermes, Inc., Federated Advisory Services Company, Federated Equity Management Company of Pennsylvania, and Federated Investment Management Company, at address 1001 Liberty Avenue, Pittsburgh, PA 15222-3779, Federated Global Investment Management Corp. at address 101 Park Avenue, Suite 4100, New York, New York 10178-0002, and MDT Advisers at address 125 High Street Oliver Street Tower, 21st Floor Boston, Massachusetts 02110.

Issued and approved by Federated Advisory Services Company

2015175120