The June employment report was much weaker than expected (+38K vs. +160K), but it's not necessarily the case that the engine of economic growth has virtually shut down. We've seen a half dozen very weak numbers like this over the past 5-6 years—it's the nature of this beast to be very volatile on a month-to-month basis. The monthly payroll numbers are simply not reliable enough to make confident judgments about the health of the economy, and, moreover, they can be revised significantly in the future.
What the report does tell us is that there is no sign of any fundamental improvement in the economy or the jobs market. There had been hints of improvement in past reports (e.g., a rise in the labor force participation rate and a quickening in the growth of the labor force), but they've been largely reversed now. As a result, it's likely that the economy is still plodding along at a miserably slow pace and will continue to do so unless and until there is a meaningful change to fiscal policy.
The Fed will find it hard to raise rates given the lack of any fundamental improvement in the jobs market, but the market fully understands this and rates are priced accordingly (no rate hikes expected for at least a few months, 10-yr yields at 1.7%, very close to their all-time low of 1.4% which was registered in July '12). Inflation expectations remain subdued (at around 1.5%), notwithstanding today's jump in gold prices and drop in the dollar. Meanwhile, liquidity is abundant (2-yr swap spreads are still very low) and the market exhibits little or no sign of any systemic stress. All eyes remain glued to the presidential elections for clues to the future, few of which have been forthcoming to date.
One reason to suspect that the June numbers were artificially low—and thus likely to be reversed in coming months—is the ADP report for June, which estimated private sector job growth to be 173K. These two series have tracked each other pretty well over the years, with the BLS series typically much more volatile. If the past is any guide, we'll see surprisingly strong jobs growth in the BLS numbers in coming months.