The labor market and the economy it supports will just not go gently into that good night despite policy efforts to cool both.
Historic inflation and interest rate shocks have not yet derailed a robust labor market that has averaged an increase of 283,000 jobs over the past three months. Roughly 1.57 million positions have been created through the first five months of the year.
In May, the economy added 339,000 jobs as the unemployment rate increased to 3.7%, the Labor Department reported Friday. Average hourly earnings increased by 0.3% and were up by 4.3% from a year ago.
The increase in the unemployment rate came from the 130,000 workers who entered the labor force as people responded to rising wages, which increased by 4.3% from a year ago.
Sustained growth in the labor market along with elevated inflation will surely tempt the Federal Reserve to increase the policy rate at its June 14 meeting. But the stealth tightening of financial conditions because of the recent banking turmoil and debt ceiling standoff—accounting for about 75 basis points—is sufficient for the central bank to hold rates steady for now. I
One factor at play is the coming tsunami of Treasury issuance (close to $1 trillion over the remainder of the year) which will drain reserves from the banking system to refill coffers of the U.S. Treasury.
While there is always the chance that the Fed will opt for a rate increase, we don’t expect that this data will alter the likely outcome.
Still, even though average hourly earnings stand at 3.8% on a three-month average annualized pace—implying that wage increases are cooling—we think that the Fed will need to raise its policy rate at least one or two more times if it is to get inflation back toward its target of 2%.
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The prime-age labor force participation rate among women sits at 77.6%, a record, while that of men stands at 89.1%.
We have made the case that the American economy is proceeding through a structural adjustment because of a lack of available workers.
The result is a historically tight labor market and an unemployment rate well below the 4.4% we consider consistent with full employment. Both will continue even if the economy were to contract in the near term.
It begs the question: Where will the workers come from?
With increased immigration off the table because of political polarization and the 16- to 24-year-old cohort not fully participating despite efforts by states, we are not convinced that those traditional avenues of increasing labor supply will prove sufficient to meet demand.
And despite the promise of artificial intelligence to boost productivity over time, it is too early in the cycle of that technology to move toward a pure substitution of artificial intelligence for labor.
But there is a cohort of workers with the skill sets to increase supply and boost productivity: Women in their prime working years of 25 to 54 who are out of the labor force because of issues around child care.
One would think that a lack of workers in the post-pandemic environment would require a different set of policy solutions than have been used over the past two generations. Higher wages and work flexibility alone will not solve that challenge.
Under such conditions, child care is going to shape the economic and policy narrative in a way that cannot be avoided.
The data
Job growth in May was decisively titled toward higher-paying work, led by a gain of 97,000 jobs in private education and health, 64,000 in professional and business services, 26,000 in goods-producing sectors, 25,000 in construction and 37,000 in trade and transport.
Roughly 56,000 higher-paying government jobs were added on the month with 7,000 of those at the federal level and 49,000 at the state and local level.
There were 10,000 jobs created in the financial sector and 8,000 temporary jobs added during May. Lower-paying work in leisure and hospitality contributed 48,000 jobs to total employment, and 12,000 retail trade jobs were created in May.
The manufacturing sector, which is contracting, shed 2,000 jobs in May and the tech sector reduced payrolls through a decline in 9,000 information workers during the month.
The labor force participation rate was unchanged at 62.6%. The median duration of unemployment stands at 8.6 weeks. The number of people employed part time for economic reasons, at 3.7 million, changed little in May
The takeaway
Job growth remain robust in what is a historically tight labor market. Despite headlines around layoffs, the duration of unemployment stands near eight weeks, suggesting that jobs remain plentiful and that those who are displaced find employment, often at better wages, quite quickly.
As long as the economy continues to produce more than 200,000 jobs a month, this economy is not going to slip into recession despite a K-shaped expansion in household consumption in which upper-end households push growth forward while down-market households contend with higher prices and barely-there real growth in wages.
