May Jobs Report Better Than Expected, But Still Not Great
May's jobs report was stronger than the previous two months, but not entirely great.
For the first four months of the year, job growth in the United States has been, at best, disjointed, disappointing, and inconsistent. In January and February, for example, there was relatively strong jobs growth, but things turned disappointing in both March and April with reports from the Bureau of Labor Statistics that seemed to pour cold water on the optimism that the first two months of the year had helped create. Even when the jobs numbers were good, wage growth, while positive, remained as stagnant as it was throughout most of 2017. This stagnant wage growth has been puzzling given the fact that the economic data suggested that a smaller available pool of labor should have led employers to increase wages to attract workers. Heading into this morning, the expectations were that the jobs report for May would show roughly 193,000 to 200,000 new jobs created, not exactly an exciting number but certainly a bounce back from the disappointing numbers of the previous month. Nonetheless, the expectation was that jobs growth would continue to be positive even if it weren’t spectacular, Indeed, as I noted in my post about the December report, the jobs market seems to be at the point where expecting massive increases in job creation are probably out of the question. Instead, we’re likely to see modest but healthy jobs growth, but not anything spectacular. As it turned out, the jobs number for May was slightly better than expected, but not necessarily
Total nonfarm payroll employment increased by 223,000 in May, and the unemployment rate edged down to 3.8 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in several industries, including retail trade, health care, and construction.
The unemployment rate edged down to 3.8 percent in May, and the number of unemployed persons declined to 6.1 million. Over the year, the unemployment rate was down by 0.5 percentage point, and the number of unemployed persons declined by 772,000. (See table A-1.)
Among the major worker groups, the unemployment rates for adult men (3.5 percent), Blacks (5.9 percent), and Asians (2.1 percent) decreased in May. The jobless rates for adult women (3.3 percent), teenagers (12.8 percent), Whites (3.5 percent), and Hispanics (4.9 percent) changed little over the month. (See tables A-1, A-2, and A-3.)
The number of long-term unemployed (those jobless for 27 weeks or more) was little changed at 1.2 million in May and accounted for 19.4 percent of the unemployed. Over the past 12 months, the number of long-term unemployed has declined by 476,000. (See table A-12.)
Both the labor force participation rate, at 62.7 percent, and the employment-population ratio,at 60.4 percent, changed little in May. (See table A-1.)
Total nonfarm payroll employment increased by 223,000 in May, compared with an average monthly gain of 191,000 over the prior 12 months. Over the month, employment continued to trend up in several industries, including retail trade, health care, and construction. (See table B-1.)
In May, retail trade added 31,000 jobs, with gains occurring in general merchandise stores (+13,000) and in building material and garden supply stores (+6,000). Over the year, retail trade has added 125,000 jobs.
Employment in health care rose by 29,000 in May, about in line with the average monthly gain over the prior 12 months. Ambulatory health care services added 18,000 jobs over the month, and employment in hospitals continued to trend up (+6,000).
Employment in construction continued on an upward trend in May (+25,000) and has risen by 286,000 over the past 12 months. Within the industry, nonresidential specialty trade contractors added 15,000 jobs over the month.
Employment in professional and technical services continued to trend up in May (+23,000) and has risen by 206,000 over the year.
Transportation and warehousing added 19,000 jobs over the month and 156,000 over the year. In May, job gains occurred in warehousing and storage (+7,000) and in couriers and messengers (+5,000).
Manufacturing employment continued to expand over the month (+18,000). Durable goods accounted for most of the change, including an increase of 6,000 jobs in machinery. Manufacturing employment has risen by 259,000 over the year, with about three-fourths of the growth in durable goods industries.
Mining added 6,000 jobs in May. Since a recent low point in October 2016, employment in mining has grown by 91,000, with support activities for mining accounting for nearly all of the increase.
In May, employment changed little in other major industries, including wholesale trade, information, financial activities, leisure and hospitality, and government.
In addition to the numbers above, the Bureau of Labor Statistics reported that total nonfarm payroll employment for March was revised upward from +135,000 to +155,000 and the number for April was revised downward from +164,000 to +159,000. This represents a net upward revision for the two months of +15,000 jobs. Combined with this month’s jobs numbers, this puts the average jobs growth for the past three months at +179.000 net jobs created per month, which is measurably and significantly lower from the previous three-month average. This represents a total of 1,037,000 new jobs created in 2018 as a whole for an average of 207,400 net new jobs created since the start of the year. Combined with the final jobs numbers for 2017, this means we’ve seen a total of 2,748,000 new jobs created since January 1, 2017, a period that has largely coincided with Donald Trump’s tenure as President, for an average over that period of +161,407 new jobs created, which is below where this average stood as of last month. As I said last month, this number is most certainly not one that indicates an imminent massive increase in hiring by employers.
During his campaign for President, Donald Trump promised to create 25,000,000 jobs during his Presidency. That would require the creation of 3,125,000 per year over an eight-year term for an average of 261,000 new jobs per month. Over a four-year term that would require 6,250,000 per year, for an average of 521,000 new jobs per month. Based on the average growth rate we have seen since the start of 2017 it would take nearly twelve and one-half years to reach that goal. Based on the average for 2018 to date, it would take roughly ten years to reach the goal. Based on the average jobs growth for the year to date, it would also take roughly twelve years to reach that goal. Based on the average for the past three months, it would also take roughly ten years to reach Trump’s goal. All of this, of course, assumes that we don’t have even a mild recession during that period. Needless to say, it is unlikely that we’re going to see sustained average jobs growth over the next three to seven years that would put us close to the 25,000,000 mark absent a significant change in the nature of the jobs market.
Looking deeper into the numbers, the average workweek across the board was once again unchanged at 34.5 hours while average hourly earnings rose 8 cents to $26.92. Over the year, average hourly earnings have risen by 71 cents or 2.7%. These are positive numbers, but still frustratingly low given what seems as though it is becoming tighter labor market. As I’ve said before, this slow wage growth could mean that we’re hitting some sort of equilibrium in the jobs market that will preclude big jumps in either hiring or hourly earnings, what it doesn’t suggest, though, is that we’re going to see massive increases in either number. This seems to be supported by the fact that the topline U-3 unemployment rate again to 3.8%, the lowest rate since before the final year of the Clinton Administration. The long-term unemployment rate (U-6), meanwhile remained largely unchanged at 7.8%, another number we haven’t seen since the first year of the Bush Administration. Realistically speaking, though. there likely isn’t much chance that we will see either number drop far below this level going forward. In the meantime, the unemployment/underemployment number, meanwhile, was essentially unchanged and both the labor force participation rate and employment/population ratio were also largely unchanged. As has been the case for the better part of the past year, the biggest concern in the numbers isn’t the jobs numbers but wage growth, which remains tepid at best.
The New York Times is fairly bullish on the numbers:
The American economy roared into overdrive last month, delivering the strongest job gains since February. The report underscored other recent signs of strength, like robust personal income and spending data reported earlier this week. Indeed, by just about any measure, the labor market is very healthy. The unemployment rate for May was at lows not seen since the heady days of the dot-com bubble.
Policymakers at the Federal Reserve are almost certain to raise interest rates when they meet this month, and have said they expect at least one more increase later this year, most likely in September or December. The stately pace of the Fed’s campaign to tighten monetary policy has reassured Wall Street, which has been edgy lately over trade tensions and the prospect of a populist-style government in Italy.
Most economists expect the momentum to continue, but the further drop in the unemployment rate and the healthy increase in average hourly earnings may well stoke fears of inflation and, in turn, a more hawkish Fed.
Diane Swonk, an economist with Grant Thornton, said the great conundrum in the current economic environment was why wage growth had been so modest. After all, a tighter labor market should prompt employers to raise salaries to keep the workers they have and lure new ones, right?
In theory, yes, but in practice it hasn’t been working out that way — and everything from slow productivity growth to the decline of unions and digital disruption has been cited as a reason.
“This is the last shoe to drop in the labor market,” said Torsten Slok, chief international economist at Deutsche Bank. “It’s just a matter of time before wages start going up more strongly, but there’s frustration that it hasn’t happened yet, even though unemployment is the lowest it has been in almost 18 years.”
Besides the other potential causes, Mr. Slok has one of his own: While job switchers are being rewarded with raises, people who stay where they are not. Nearly 15 percent of what he calls “job stayers” saw no increase in wages in the past 12 months. At comparable periods in past economic cycles, that share was more like 10 percent.
“If you just stay around, you have less bargaining power,” Mr. Slok said
CNBC is also fairly positive:
The U.S. economy continued to add jobs at a solid clip in May, with nonfarm payrolls up 223,000 while the unemployment rate fell to 3.8 percent, the Bureau of Labor Statistics reported Friday.
Economists had been expecting payroll growth of 188,000 and the jobless rate to hold steady at 3.9 percent.
The unemployment rate was last this low in April 2000. A separate level of unemployment that adds in discouraged workers and those holding part-time positions for economic reasons fell to 7.6 percent, the lowest since May 2001. A one-tenth point decline in the labor force participation rate to 62.7 percent, tied for the lowest level in 2018, contributed to the headline unemployment rate decline.
The closely watched average hourly earnings metric rose 0.3 percent, as expected. That translates to an annualized rate of 2.7 percent, up one-tenth of a point from April.
“The employment this month really underscores, once again, the robust strength of the labor market,” said Steve Rick, chief economist at CUNA Mutual Group. “May showed steady momentum in jobs and certainly hit back at any worries among economists who thought hiring was beginning to finally slow after seeing last month’s report.”
Investors have been looking through the headline job gains to see whether a tight labor market was pressuring wage growth. The Federal Reserve in particular has been watching for inflationary signs. Central bank officials have indicated that two more interest rate hikes are likely this year on top of the one already approved in March.
The report “had everything needed to support a June rate hike by the Fed,” said Paul Ashworth, chief U.S. economist at Capital Economics. Indeed, traders moved up the probability of a June hike to 94 percent, a September increase to 72.5 percent, and a fourth hike this year in December to 37 percent, according to the CME.
“A combination of increasingly tight labor conditions and rising inflation puts the Fed in a position to build on their prior interest rate hikes as policymakers attempt to execute a steady, controlled return to normal policy,” said Jim Baird, chief investment officer for Plante Moran Financial Advisors.
On the whole, the numbers for May were fairly good across the board, and certainly better than what we saw in March and April. Whether this represents the beginning of a new trend, though, is hard to tell. As I noted above, January and February both saw strong jobs numbers only to see the report bring disappointment in March and April. So, we could be looking at the beginning of a new trend here, or we could be looking at a momentary statistical blip. In that last regard, it’s again worth keeping in mind that all the available data shows that the jobs market is continuing to tighten, which means that we’re not likely to see huge job creation numbers going forward. Additionally, it’s hard to say what the impact of everything from December’s tax cuts to the new tariffs that the White House has been putting forward since March will have on the economy, although the Office of the U.S. Trade Representative is saying that the tariffs are likely to wipe out whatever job gains we see from the tax cut. Additionally, the fact that wage growth remains flat at best tends to defy expectations given the fact that a tight labor market should mean that wages go up as employers start to compete for workers in an ever smaller pool. Part of the issue seems to be that, at least in some fields, employers are having trouble finding qualified workers and are having to resort to on-the-job training, which increases labor costs and could be putting some downward pressure on wages. At the very least, though, there are no signs of this changing at any point in the near future, which is why the phrase “Goldilocks economy”may be the best description of our current situation. Whether that will be good enough going forward, though, remains to be seen.