The U.S. labor market showed more strength than expected in June, with employers hiring at a robust pace, a report that makes the Federal Reserve’s next move more complicated.

The numbers

Employers added 224,000 new positions in the month, a Labor Department report showed Friday. That follows a downwardly revised 72,000 gain in May and beats the median estimate among economists for a 160,000 rise, according to a Bloomberg survey.

The unemployment rate, however, edged up to 3.7 percent, up from its lowest rate of the expansion and higher than economists had expected.

Average hourly earnings grew on an annual basis by 3.1 percent, missing forecasts and showing that inflationary pressures likely building.

The breakdown

Job gains were broad-based and present in most sectors, with gains concentrated in private  service-producing sectors.

Employment in professional and business services climbed by 51,000, mostly within professional and technical services. Health care boosted payrolls by 34,900, according to the report. Positions in trade, transportation and utilities jumped by 20,000.

Construction companies added 21,000 positions, the fourth-straight gain.

Manufacturers rebounded, adding 17,000 jobs after a scant 3,000 increase in the prior month. Firms have been battered by weaker global demand on slower growth, as well as ongoing trade tensions between the U.S. and China.

Government jobs grew by 33,000, led by a jump in 26,400 local government positions, excluding education. Retailers, however, cut 5,800 jobs, with weakness persisting for a fifth-straight month.

The three-month average of job creation is now about 171,000, a measure that many economists follow to exclude month-to-month volatility. That’s well above economists’ estimates for an average monthly job gain of 153,380, according to a second quarter Bankrate survey.

Revisions in both May and April subtracted 11,000 positions from the U.S. economy.

The labor force participation rate, or the share of working-age individuals in the labor force, increased to 62.9 percent from 62.8 percent.

The big picture

The June jobs report is a critical one – not just for individuals looking for signs of cracks in the economy, but for the Federal Reserve, which signaled a willingness to cut rates for the first time in more than a decade.

Fed Chairman Jerome Powell told journalists following the U.S. central bank’s rate-setting meeting on June 19 that officials were willing to “act as necessary” to sustain the U.S. expansion, while the Fed’s forecast of its benchmark interest rate showed that eight officials were penciling in at least one reduction by the end of this year.

Market participants are betting that the Fed will cut rates when it next meets on July 30-31. About 89 percent of investors expect a 0.25 percentage point cut, while 11 percent expect a more drastic 0.50 percentage point reduction, according to CME Group’s FedWatch.  

The jobs figures, however, make that likelihood more complicated. The rebound in June suggests the U.S. economy remains on firm footing. The outlook, however, is still uncertain, with trade tensions and slower global growth acting as headwinds.

The takeaways

“It turns out there were a few fireworks left on the day after Independence Day,” says Mark Hamrick, Bankrate’s senior economic analyst. “With a stronger-than-expected reading on hiring, the plot thickens with respect to the Federal Reserve’s decision on interest rates at the end of this month.  The central bank may still attempt to mollify investors by putting a modest, so-called insurance cut in place. The array of headwinds associated with slowing global growth, trade disputes and tariffs haven’t gone away.”

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