May Jobs Report – Reading Between the Lines — Evening Brief – 06.07.24
The U.S. labor market added 272,000 nonfarm payroll jobs in May, defying fears of a slowdown and far exceeding economists’ expectations of 180,000. The unemployment rate, however, increased to 4% from 3.9% in April, offering contradictory signals about the broader employment picture.
The increase in the unemployment rate was due to a stunning disparity between the Establishment and Household Surveys, with the former increasing by 272,000 and the latter decreasing by 408,000.
The Household survey also revealed that full-time employment fell by 625,000 to 133.3 million, the lowest since February 2023, while part-time employment increased by 286,000 to 28 million, the most on record.
Digging a bit deeper, April hiring was revised from 175,000 to 165,000, while March hiring was revised from 315,000 to 310,000. The labor-force participation rate fell to 62.5% in May from 62.7% in April, while average hourly wages increased 0.4% in May, compared to estimates of 0.3%.
The increase in average hourly earnings meant that after dropping every month since January, hourly wages rose on an annual basis, up 4.1% from the upward revised 4% in April.
The jobs report continues to leave the Federal Reserve at an impasse regarding its next decision on monetary policy. The economy and job market have remained resilient, and inflation has continued to remain stubborn, bolstering the argument for maintaining a restrictive stance.
Yet, we have seen pockets of evidence – weak manufacturing surveys and leading economic indicators, among others – that suggest there is a strong justification to loosen policy.
“One step forward, two steps back,” said Seema Shah, chief global strategist at Principal Asset Management. “Today’s data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut. Not only has jobs growth exploded again, but wage growth has also surprised to the upside – both moving in the opposite direction to what the Fed needs to begin easing policy. “
Following the jobs report, the probability of an interest rate cut in September declined to 56% from 68% on Thursday, according to the CME FedWatch Tool. The odds of a second rate cut in December are now 50-50 after being around 68% ahead of the data.
Morgan Stanley, which is sticking with three Fed rate cuts for 2024, starting in September, said “We think the Fed will see the rise in the unemployment rate as sign of further slackening.”