Headline nonfarm payrolls rose by just 138,000 in May, versus an anticipated 182,000. Meanwhile, April and March’s data points were revised even lower by a total of 66,000. The unemployment rate was lower at 4.3% (lowest since May 2001), and the participation rate was also down at 62.7% (lowest since December). There was a large rise of 608,000 in the group classified as “not in the labour-force,” following an increase of 162,000 in May. The U6 unemployment rate (an expanded measure of unemployment that takes into account marginally attached and part-time workers) was unchanged at 8.4% in May. The household survey showed a sharp decrease of 233,000 jobs in the month (largest since April 2016), following an increase of 156,000 in April. Meanwhile, the adjusted household survey (the BLS’s attempt to make it more comparable to the payroll survey) pointed to an increase of just 388,000, after a rise of 6,000 in April.
Private nonfarm average hourly earnings were 0.2% higher in May (0.1% for production and nonsupervisory workers) and follows 0.2% in April. Annually, they are now 2.5% higher (2.4% for production and nonsupervisory workers); this still indicates some moderate upward pressure. Private average weekly hours for production and nonsupervisory workers were 0.3% lower after being 0.3% higher, and being unchanged for the prior seven consecutive months before that; they are now flat compared to a year ago. The 138,000 change in May’s payrolls was largely due to education and health service (47,000), professional and business services (38,000), leisure and hospitality (31,000) and finance (11,000). Manufacturing fell by 1,000, retailing by 6,000 and government by 9,000. Meanwhile, the mean duration of unemployment was higher at 24.7 weeks.
This was clearly a weak employment report, well below the 12-month
trend reading of 186, 000, and expectations that had been boosted by a strong ADP figure earlier in the week. Nevertheless, companies continue to show high levels of confidence in the economic recovery, whilst also reporting some difficulties in finding qualified labour, as was quite clear in yesterday’s ISM manufacturing report and Wednesday’s Beige Book report. For example, the Beige Book noted: “Labor markets continued to tighten, with most Districts citing shortages across a broadening range of occupations and regions. Despite supply constraints impeding the ability of firms to attract and retain qualified workers, most Districts reported that employment continued to grow at a modest to moderate pace. Similarly, most firms across the Districts noted little change to the recent trend of modest to moderate wage growth, although many firms reported offering higher wages to attract workers where shortages were most severe. A manufacturing firm in the Chicago District reported attracting better applicants and improving retention for its unskilled workforce by raising wages 10 percent.” Meanwhile, the supply of shadow labour (U6 - U3) is now 4.1%, which is below its historical average of 4.7%, but still far from the lows of 3.0% and 3.5% reached in 2001 and 2006. It also shows that while wages have lagged this growth in employment they are still on a slow but steady upward trajectory. As far as the Fed is concerned, this will be unlikely to prevent a rate increase on June 14 (though we may see a dissenter or two), but it does raise question marks as to the prospects of another increase in September particularly in light of the recent lower inflation data.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.