The May report on jobs provided a mixed, but still largely positive, look at the current state of the labor economy. Big picture? Labor conditions are still tight, employers are still hiring, and it’s still a constructive environment for those looking for work.
Underlying that is a more nuanced picture of the changes taking place. Unemployment continues to creep higher, breaching the 4.0% threshold in May for the first time in over two years. The single-month increase was negligible but has now risen by 0.6% in just over a year. That’s a meaningful increase that aligns with other signs of an evident easing in what had been incredibly tight job market conditions.
Cooler but not cold is an apt description of the pace of job creation, which surprised to the upside in May. Employers added 272,000 new jobs for the month — an increase that easily topped expectations, even after accounting for revisions that shaved 15,000 jobs from previously reported gains for March and April.
Hiring was widespread across the economy, with payrolls for goods producers, the service sector, and public sector government workers all expanding.
Against the backdrop of unexpectedly positive survey results from employers, the household survey provided a contrasting view that was less rosy. Beyond the uptick in the unemployment rate, the survey indicated an increase of 157,000 in the ranks of the unemployed and a decline of 408,000 employed individuals, with 250,000 of those leaving the labor force altogether.
Over time, the employer and household surveys should tell a similar story, but it’s too early to tell whether the recent divergence is a sign of deeper cracks appearing in the foundation of the labor economy or a temporary anomaly.
Also noteworthy in the report was the uptick in average hourly earnings, which edged up from 3.9 to 4.1% over the past month.
As both the number of job openings and the voluntary quits rate continue to decline, wage growth is also expected to moderate further. That’s good news for employers that have had to pay up for talent in recent years, and perhaps even better news for Fed policymakers seeking durable evidence that their aggressive tightening measures are having the desired effect in taking some of the froth out of the labor economy, partially clearing the path for inflation to recede back toward 2%.
Inflation in the service sector remains a problem, in part due to the rising cost of labor, which often represents the key component of the cost structure for service businesses.
The report doesn’t likely move the needle on near-term expectations for the Fed, which isn’t expected to budge on rates at its policy meeting next week or in July. September is shaping up to be the meeting to watch, although even that’s being increasingly questioned given the stickiness in labor and inflation data.
Regardless of when policymakers finally decide they’ve seen enough to be comfortable taking the foot off the brake, it will be a far cry from what had been expected coming into 2024, with as many as six cuts anticipated by the end of the year.
The bottom line? The labor economy is slowing, but by most measures remains on a solid footing. Cracks in the household data may be a precursor of a more pronounced slowdown in nonfarm payroll growth, but for now, labor conditions remain relatively tight.
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