First, the bottom line: The labor market is hanging in, but showing signs of fatigue
- The headline numbers on labor conditions were good — no doubt about that; the good news might end there though.
- The steady unemployment rate notwithstanding, cracks are becoming more evident in the labor market. Job openings are down, job creation has slowed, and unemployment claims continue to edge higher.
- The fact that nearly all the payroll gains in May were concentrated in just two sectors also raises questions about the true underlying strength of the broad labor market.
- There’s no question that the significant overhang from policy uncertainty is weighing heavily on businesses and consumers alike. Although peak pessimism about tariffs has seemingly passed, there’s an understandable hesitance on the part of employers to hire when the outlook remains murky.
- The question remains: Will consumers continue to spend despite lingering questions about the near-term outlook? As long as they’re comfortable that their jobs aren’t at risk, and income gains remain solid, the fuel should be there.
- Over time, consumers have shown a remarkable resilience and propensity to spend even through some degree of economic stress. Even so, the negative flywheel effect of softer labor conditions weighing on consumer sentiment and dampening spending remains a risk.
By the numbers: Decent May, but downward revisions to March and April gains dampen positivity
- Job creation was modestly better than anticipated in May, coming in at a solid 139,000, topping forecasts by a small margin.
- Any optimism that might be sparked by the better-than-expected monthly gain should be dampened by the significant downward revisions to job gains for March (-65K) and April (-30K). The net gain of just 44,000 is more consistent with a labor economy that’s showing some wear than one that’s firing on all cylinders.
- Further, job gains were narrowly concentrated in two sectors: healthcare and leisure & hospitality. Hiring weakness in manufacturing and other service sectors is a sign of a more cautionary stance across a range of industries.
- Job creation was good enough to keep the unemployment rate unchanged at 4.2% for the third consecutive month — a reading that’s consistent with a labor market at or near full employment.
- Average hourly wages grew by 0.4% in May, which is a bit on the high side, but not alarmingly so coming on the heels of two very soft monthly gains. Hourly wages have increased by 3.9% over the past year, a manageable range that remains well above the pre-2020 norm but well off the gains seen as the labor market overheated during the post-pandemic recovery.
Broad thoughts: “Good enough” report to keep the Fed on the sidelines for now
- For a Fed seeking greater clarity in the tug-of-war between the contrasting risks presented by higher inflation and softer labor conditions, today’s report isn’t likely to move the needle much. Wage gains aren’t strong enough to sound any alarm bells on the inflation front, and the steady unemployment rate and net positive job creation suggest that there’s still enough juice in the labor market that rate cuts aren’t yet necessary.
- Coupled with other recent data, the May jobs report isn’t likely to spur the Fed to action. The Fed’s next move is still likely to be a rate cut, but there’s little in the data to suggest that they should be in a hurry to do so.
- For the Fed, the report was likely good enough to give policymakers more time to monitor developments on multiple fronts, most notably, the evolution of trade policy and the potential near-term impact of tariffs on inflation and growth.
- The market’s positive reaction to the report seems to focus on the positive headline numbers, with less attention to the revisions and limited job creation outside of a few bright spots. On the heels of Wednesday’s ADP report of the slowest pace of private sector hiring in over two years, investors had braced for disappointment in the government numbers.
- In that regard, the relative weakness allowed investors to breathe a sigh of relief. It’s not a jobs market that’s firing on all cylinders, but it also hasn’t lost all positive momentum.
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