Labor market begins to retrench
Fed remains on track for more half-point hikes.
The good news is that the labor market in May was relatively solid, with a stronger-than-expected nominal gain of 390,000 nonfarm jobs (versus 436,000 in April). That’s better than Bloomberg’s estimated consensus gain of 318,000 and slightly above our more constructive forecast here at Federated Hermes for an increase of 377,000. In addition, the household survey posted a strong May rebound with an increase of 321,000 workers (versus a loss of 353,000 in April), the participation rate rose a tick to 62.3% and wage inflation moderated to a year-over-year (y/y) gain of 5.2%, down from 5.5% in April and 5.6% in March.
Fed stays aggressive The report likely will do nothing to dissuade the Federal Reserve to execute half-point fed funds rate hikes on June 15 and July 27. Policymakers also will begin to shrink its bloated $9 trillion balance sheet on June 15, allowing $47.5 billion securities to roll off in each of June, July and August ($30 billion in Treasuries and $17.5 billion in mortgage-backed securities, or MBS), rather than sell them outright. Starting in September, they will accelerate that pace to $95 billion monthly ($60 billion in Treasuries and $35 billion in MBS). Their long-term plan is to cut the Fed balance sheet by a third over the next three years.
Jackson Hole celebration? If Fed officials are able to lower inflation in the summer from the present 40-year highs, they could take a much-desired victory lap at their annual Jackson Hole, Wyo., monetary policy symposium in late August. But future Fed policy decisions will be data dependent, in our view. Based on today's jobs report, we place no credence in the market rumor that the Fed may pause in September. Rather, we think the decision will be to deliver another half-point hike, if inflation remains hot, or to shift to quarter-point hikes at each of the last three policy-setting meetings of 2022.
Financial markets reverse on stagflation triple play After a dead-cat bounce of nearly 10% over the past fortnight, the S&P 500 is down almost 2% today, as equity investors have begun to wake up to the reality of slower economic growth, high inflation and tighter Fed policy. Benchmark 10-year Treasury yields plunged from 3.15% to 2.70% during May, but they have bounced to nearly 3% over the past week.
Turning a battleship in the ocean The bad news embedded in this morning’s jobs report is that the labor market has begun to slow over the past several months. While today’s gain of 390,000 jobs in May beat consensus, it’s a 45% decline from February’s addition of 714,000 jobs. Private payrolls have plummeted 53% from February’s addition of 704,000 jobs to May’s gain of 333,000. Nancy Lazar, Piper Sandler’s chief economist, points out that 61 high-profile companies have already announced layoffs or hiring freezes since February, which suggests that this negative trend on slowing payroll growth may accelerate through the back half of 2022.
Wage inflation slowing Annual wage gains declined to 5.2% in May from 5.5% in April and 5.6% in March. Importantly, sequential monthly wage gains were unchanged in May at 0.3% m/m, with an annualized pace of 3.6% over the past four months and 4.6% over the past six. Why the slowdown? Because weekly hours worked in May were unchanged at 34.6 for the third consecutive month and for the fourth time in the last five months.
Unemployment rate flat, but labor impairment & participation rates rise Despite its impressive rebound in May, the household survey has plunged 73% from its January peak of 1.2 million new jobs. In May, the number of unemployed people rose for the first time in four months by 9,000 (versus declines of 11,000 in April, 318,000 in March and 243,000 in March). As a result, the unemployment rate (U-3) was unchanged for the third consecutive month at a cycle low of 3.6% in May, slightly higher than the pre-pandemic, half-century low of 3.5% in February 2020. The labor impairment rate (U-6) ticked up for the second consecutive month to 7.1% in May. The civilian labor force rose by 330,000 workers in May, which largely reversed April’s decline of 363,000 people, driving the participation rate up a tick to 62.3% in May, although it is still a tick lower than March’s cycle high of 62.4%.
K-shaped recovery improves High-paid workers saw their unemployment rate remain at 2% for the third consecutive month. But the unemployment rate for low-wage workers declined to 5.2% in May from 5.4% in April, although it’s still higher than its 30-year low of 4.3% in February.
JOLTS, ADP & claims soften The lagging Job Openings & Labor Turnover Survey (JOLTS) slipped nearly 4% in April to 11.4 million jobs, compared with an upwardly revised record high of 11.86 million open jobs in March. There are still 1.9 job openings for every unemployed worker. Voluntary quits eased to 4.4 million workers, with a quits rate of 2.9%—both just off record highs. The ADP private payroll survey suffered a huge miss in May, adding a much weaker-than-expected 2-year low of only 128,000 jobs in May (consensus at 300,000), down 79% from a gain of 601,000 in February. Small companies, the engine of employment growth in the U.S. economy, lost 91,000 jobs in May, and now have declined in three of the past fourth months. After troughing at a more than half-century low of only 166,000 initial weekly jobless claims for the week ended March 19, claims have risen 20% in the last 10 weeks to 200,000 on May 28. Less noisy continuing claims are still at a cycle low of 1.31 million for the week ended May 21. All of these numbers point to further labor market weakness
Sector details sloppy The manufacturing sector added a much weaker-than-expected 18,000 jobs in May (consensus at 39,000), well below 61,000 new jobs in April, 58,000 hires in March and 50,000 in February. Construction enjoyed a strong rebound in May, adding 36,000 jobs, compared with no new hires in April, 22,000 in March and 54,000 workers in February. But as higher mortgage rates have impaired housing activity in recent months, we expect that construction hiring is at risk. Easter spending (up 8% y/y) grew at only half the pace of robust Christmas spending (up 16% y/y), so retail hiring has slowed sharply, shedding 61,000 jobs in May, versus adding 12,000 new jobs in April, a loss of 23,000 jobs in March and the addition of 111,000 jobs in February and 121,000 in January. Temporary hiring, a leading indicator of employment trends, added 19,000 workers in May, versus only 7,000 jobs in April, 8,000 in March and 28,000 in each of February and January. Leisure & hospitality has slowed considerably over the past five months, adding only 84,000 jobs in May, compared with 83,000 jobs in April, 104,000 in March, 124,000 in February, 138,000 in January, 186,000 in December and 191,000 in November. This slowdown has negatively impacted low-wage workers.