It is a good thing that the American economy is so resilient and dynamic because it has been able to endure the headwinds caused by an ever-changing trade policy and higher tariffs.
That resilience, though, has its limits, as the May employment report started to show on Friday.
Job creation continued to cool in May as the economy created 139,000 jobs, just above the RSM forecast of 125,000, and the unemployment rate held steady at 4.2%. When taken out to three digits, the jobless rate was 4.244%, which is just shy of the rounded 4.3% level.
Average hourly earnings increased by 0.4% on the month, which translated to a 3.9% gain from a year ago and was just above the 3.5% three-month average annualized pace. That increase should continue to support modest gains in quarterly domestic consumption.
But the steady drumbeat of downward revisions to first estimates by the Bureau of Labor Statistics also continued. The March and April employment data was revised down by 95,000 jobs, resulting in a weak net change in total employment of 44,000 for those months.
From our perspective, this number is a better preview of what is to come in the American economy as the adverse impact caused by trade policy slowly arrives.
Policy implications
The Federal Reserve will tend to look at this report as a status quo-affirming look at the labor market, which supports what the recent Fed Beige Book implied: an economy that is slowing and in some cases on hold until further clarity can be ascertained on trade and tariff policy.
We do not expect the Fed to change policy at either its June or July meetings and will need to obtain better information on firm margins, which figure to narrow on the back of rising trade taxes and inflation.
The data
Deep inside the May report, one can observe the impact of trade policy as transportation and warehousing nonsupervisory hiring declined by 8,600 jobs on the month, which is consistent with near real-time shipping and port data.
Manufacturing employment fell by 8,000 jobs and goods-producing industries had a decline of 5,000 jobs. Both are higher-paying sectors and are likely to accelerate in their job losses.
On a three-month average, overall hiring slowed to 135,000, which is in line with the 139,000 top-line figure following the downward revision to 147,000 in April and 120,000 in March.
Over the past six months, once the downward revisions are factored in, the average pace of hiring now stands at 157,000.
Not surprising were the increases of 87,000 jobs in private education and health care, two areas of the economy more immune to tariffs.
Trade and transport advanced by 4,000 jobs, information workers increased by 2,000 and financial hiring improved by 13,000.
Retail and trade jobs declined by 7,000, professional business services dropped by 18,000 and temp hiring fell by 20,000.
Read more of RSM’s insights on the economy and the middle market.
Government hiring declined by 1,000 with federal government hiring dropping by 22,000.
Inside the household survey, which includes self-employed workers as well as workers employed by businesses, there was a large decline of 696,000 in the total workforce.
Two numbers to watch given anecdotal evidence are workers who have been looking for employment for an extended period of time, and total private hours worked, which were flat on the month.
If if hours worked do not increase or at the very least keep at current levels, then one should begin to consider the broader risk to the current cyclical expansion.
The median duration of unemployment stands at 9.5 weeks, the labor force participation rate declined to 62.4% from 62.6% while the employment-to-population ratio fell from 60% to 59.7%.
The takeaway
The pace of overall hiring continued to cool in May as the first evidence of damage caused by trade and tariff policies showed up in the manufacturing, goods producing, warehousing and trucking sectors.
The number we more closely monitor—total change in employment—increased by a scant 44,000, which tends to suggest that we are about to enter a period where monthly gains will fall below 100,000, which is the level necessary to maintain stable employment conditions.
The three-month average pace of overall hiring stands at 135,000 and we expect that to continue to cool as firms pull back on hiring because of the uncertainty surrounding trade policy.
Although the unemployment rate held steady at 4.2% it was just shy of being labeled 4.3% after rounding. We are confident that as monthly hiring cools, the unemployment rate will increase.
The data is consistent with the current policy stance at the Federal Reserve of holding rates steady. Neither investors nor other policymakers should anticipate any near-term reduction in the federal funds rate as the central bank awaits further evidence of the impact caused by the significant changes in trade policy.
