The signals we’re getting from the labor market and the economy are hard to decipher. Job growth has been surprisingly strong the last three months, averaging 184,000 a month, well above any estimates of the breakeven pace needed to keep the unemployment rate stable. At the same time, wage growth has slowed, according to both the average hourly earnings series and the Employment Cost Index. With the recent jump in inflation, wages are not even keeping pace with prices.

The other part of the story that is hard to put together is that productivity growth seems to be lagging even as we are barraged with stories about AI taking all the jobs. Productivity growth was just 1.6 percent in the fourth quarter of last year and 0.3 percent in the first quarter of this year. That is well below the 2.1 percent average since the pandemic. With GDP growth likely to come in around 2.5 percent, productivity looks to again be very slow in the current quarter.

Productivity data are notoriously erratic and subject to large revisions, but it is difficult to ignore three consecutive quarters of weak growth. We certainly can’t rule out that there will be a big productivity boost in the future from AI, but it’s fair to say that we are not seeing it yet.

Health Care to Again Lead Job Growth

The health care sector has consistently been the leading source of job growth and that will almost certainly continue to be the case in June. The health care sector added 35,200 jobs in May, with the larger health care and social assistance (largely home health aides) sector adding 47,200 jobs. This is very much in line with their average monthly job growth of 38,000 and 54,000 jobs, respectively. There is little reason to think that the June numbers will be very different.

The May Jump in Local Government Jobs May Be Partially Reversed

Local government employment increased by 55,000 in May, with most of it not in education. That compares to an average gain of 12,000 in the year to April. It’s not obvious why local governments, many of which face serious fiscal problems, would have suddenly hired so many workers in May. It is likely that this was a fluke and much of the gain will be reversed in June.

There was also an unusually large rise in restaurant employment of 48,000 in May. This could have been weather related. It is striking given that real spending in restaurants has been flat or even falling since last summer. There may be some reversal in June, although the World Cup will provide some boost.

Goods Sector Employment to Remain Weak

There was growth in all three components of the goods sector, with construction by far the leader, adding 17,000 jobs. This is considerably better than the 4,000 monthly average over the year until April. With real construction spending flat, the number for June is likely to be considerably smaller.

Manufacturing added 4,000 jobs in May, the fourth gain in the last five months. Employment is still down by 46,000 from the year-ago level. Any change in either direction in June will be small. Employment in mining, which includes drilling for oil and gas, rose by 4,000 in May, mostly related to oil and gas drilling. There could be some further gain in June, but companies are reluctant to commit to a major increase in drilling since they don’t expect oil prices to remain high.

Job Losers: Air Travel, Insurance, and Motion Pictures

Air travel lost 8,700 jobs in May; there will likely be a further decline in June due to high fuel prices. The insurance industry lost 10,700 jobs last month, a possible AI story. And the motion picture industry lost 2,700 jobs, continuing a slide that began in November of 2022.

Wage Growth to Remain Weak

The year-over-year growth in the average hourly wage slowed from just over 4.0 percent in 2023 and 2024 to 3.4 percent in May. The Employment Cost Index shows a comparable slowing. Wage growth does not turn around quickly, but if we continue to see strong employment growth, there should be some uptick in the rate of wage growth.

Unemployment Will Edge Lower

The strong job growth of the last three months should be sufficient to push the unemployment rate down. Even assuming growth is considerably weaker in June than the average of the prior three months, the unemployment rate should edge down to 4.2 percent.

Duration of Unemployment Spells is Getting Longer

One of the anomalies in the data is that even as job growth is strong, it seems that unemployed workers are having a harder time finding jobs. The median duration of unemployment spells has risen to 26.0 weeks from 21.9 weeks in May of last year. This is the highest it’s been since February of 2022.

In a similar vein, workers continue to be reluctant to quit their jobs. The share of unemployment due to voluntary quits was 12.5 percent in May. That’s up from 11.3 percent in April, but still well below the levels in the comparably tight labor markets of 2018-19.

Employment-to-Population Ratio for Black Workers May Rise

There was a big jump in the unemployment rate for Black workers in 2025, as the unemployment rate for whites barely budged. After peaking at 8.2 percent in November, it fell back to 6.6 percent in May, just 0.4 percentage points (p.p.) above the January 2025 level, although this is still 1.8 p.p. above the low hit in April of 2023. However, the employment-to-population ratio for Black workers is still 0.8 p.p. below its January 2025 level, and 2.8 p.p. below the peak in March of 2023.

Mostly Positive Report with Some Serious Issues

The headline numbers for June should be good. We will likely see decent job growth in the range of 60,000 to 70,000, with a small drop in the unemployment rate. The concerns start with the fact that it is likely to be concentrated in the health care and social services sector, with few gains elsewhere.

Wage growth is also likely to remain weak, with workers struggling to keep pace with inflation. The duration measures also indicate that workers who are unemployed have difficulty finding new jobs. This, along with the low percentage of unemployment due to quits, suggests that workers do not feel very good about the state of the labor market.