This economic commentary is dedicated to the memory of my friend the economics reporter Ben White. I shall miss talking economics, policy and baseball with him.
Labor demand continues to increase at a remarkably strong pace, which removes the prospect of a July rate reduction and creates the sense that the Federal Reserve may fall further behind other central banks as they pivot to lower rates.
The strong increase in wages and higher-paying jobs ireduces the probability that the Fed will cut rates twice this year.
The strong increase in wages and higher-paying jobs in the May jobs report reduces the probability that the Fed will cut rates twice this year, which was the baseline of our Fed call and market expectations ahead of the report.
The increase of 272,000 in hiring in May—total employment rose by 257,000 because of a net downward revision of 15,000 in the March and April estimates—was driven primarily by strength in higher-paying jobs in sectors including goods production, construction, government and health care.
That increase in higher-paying jobs was reflected in the 0.4% advance in average hourly earnings, which translates to a 4.1% increase in wages over the past year. That figure is above the three-month average annualized pace of 3.8%.
The unemployment rate increased to 4%, or 3.964% when taken out to three digits, which continues a remarkable string of months with the unemployment rate at or below 4%. From our vantage point, this is the strongest labor market since the 1950s.
The data
The primary takeaway from the May employment data was hiring in higher-paying jobs. Goods-producing jobs increased by 84,000, health care increased by 25,000, construction by 21,000, trade and transport by 27,000, professional business services by 33,000 and government by 43,000.
Manufacturing hiring advanced by 8,000 jobs, while leisure and hospitality rose by 42,000. Information hiring was flat on the month. Temporary help declined by 14,000.
The household survey reflected a decline of 408,000, while the labor force declined by 250,000.
Total private hours worked in the overall economy and in manufacturing had no increase on the month, while aggregate hours worked increased by 0.2%.
The employment-to-participation rate was 62.5% and the employment-to-population rate stood at 60.1. There were 161 million people at work in May.
The median duration of unemployment stood at 8.9 weeks, which means that workers who lose a job will most likely find one within three months.
The takeaway
The American labor market, like the economy, remains remarkably resilient as it adapts to changing demographics and market demand.
We think that the May jobs data reflects strong and sustained labor demand, which has resulted in a solid 4% increase in wages over the past year—good news for the American household.
Read RSM’s outlook on interest rates from our global team of economists in the latest issue of The Real Economy.
We anticipate that hiring will cool in response to a normalization in growth back toward the long-run sustainable average of 1.8%.
The risks around our outlook are balanced between continued economic outperformance and a policy error by the Fed if it keeps rates too high for too long, resulting in a premature end of the business cycle.
