Surprisingly robust May jobs report Surprisingly robust May jobs report December 6 2018

Surprisingly robust May jobs report

Lots to like in the labor report and little to keep the Fed from a June hike.
Published June 1 2018
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Bottom line Despite softer trends in both initial weekly claims and the private ADP report, the Bureau of Labor Statistics (BLS) reported surprisingly stronger-than-expected nonfarm and private payrolls in May, with healthy gains of 223,000 and 218,000 jobs, respectively. Along the same line, previously disappointing March results were revised higher. In addition, the unemployment rate (U-3) declined to 3.8% in May—matching April 2000 as the lowest level in nearly half a century—while average hourly earnings ticked up to annual pace of 2.7%.

True, hours worked remained flat for the fourth consecutive month, and the participation rate slipped a tick to 62.7%. But the household survey soared by 293,000 workers last month, up sharply from a tepid gain of only 3,000 workers in April, and the labor-impairment rate (U-6) continues to fall rapidly, dropping to 7.6% last month from 8.2% in February.

Taken together, the data supports our view that economic growth is accelerating sequentially in the second quarter. As a result, we continue to expect Federal Reserve Chair Jerome Powell to hike interest rates by another quarter point at the Fed’s upcoming June 12-13 policy-setting meeting.

Better-than-expected nonfarm payroll gains The 223,000 jobs added in May were well above the Bloomberg consensus of 190,000 (and our own estimate of 185,000 here at Federated). The BLS revised March higher again, from a disappointing preliminary gain of 103,000 jobs to a revised increase of 135,000 last month to a final gain of 155,000 this morning. April was revised down slightly, from a preliminary increase of 164,000 jobs to a gain of 159,000 this morning. So with May’s solid pop, perhaps the 2-month lull in job creation during March and April is now behind us.

Household survey reaccelerates The admittedly volatile household survey rebounded by 293,000 jobs in May, which is a sharp improvement from April’s tepid gain of only 3,000 and March’s outright decline of 37,000 due to the snow storms. February, in contrast, had added a stunning 785,000 jobs. This leading indicator for nonfarm and private payrolls serves as the basis for the unemployment rate.

Unemployment, labor-impairment and participation rates all fall The unemployment rate continues to decline. After hitting 4.1% in March and 3.9% in April, it fell to 3.8% in May, a new 49-year low (December 1969). The labor-impairment rate—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—also keeps falling, sliding to 7.6% in May, down from 7.8% in April, 8% in March and 8.2% in February. Finally, the labor-force participation rate (the share of working-age people in the labor force) also slipped another tick in May to 62.7%, down from a 5-month high of 63% in February, but still above a 41-year low of 62.3% set in September 2015. The civilian labor force grew by 12,000 workers in May, reversing the declines of 236,000 workers in April and 158,000 in March.

Wages rise but hours worked remain flat Average hourly earnings on a year-over-year basis rose by a better-than-expected 2.7% in May, which is a tick higher than the prior three months. But that’s still below January’s healthy 2.8% increase. However, wages rose 0.3% month-over-month in May, which is a 5-month high, so wage growth may finally be starting to accelerate. For the fourth consecutive month and the sixth time in the past seven months, the average private workweek for all employees was unchanged at 34.5 hours in May. Each additional 0.1 hour worked theoretically adds 350,000 jobs to the economy.

Construction rises while manufacturing slips Construction added 25,000 jobs in May after adding an upwardly revised 21,000 in April, a sharp improvement over the loss of 3,000 in March. Construction had added 67,000 jobs in a relatively warm February, so we’ve still got some catching up ahead of us. Manufacturing added only 18,000 jobs in May, down from 25,000 in April, 21,000 in March and 31,000 in February. With the manufacturing sector perking up, we expect these job totals to improve soon.

Retail and transportation rise, but temps decline On the strength of the best “Mapril” retail sales in six years, retail added 31,000 jobs in May, compared with modest gains of only 9,000 in April and 11,000 in March, versus a strong 46,000 jobs in February. Transportation (companies such as FedEx and UPS) added 19,000 jobs in May, up from 2,000 in April, and versus 20,000 in March. Finally, temporary help (a leading economic indicator) lost 8,000 jobs in May, after adding 9,000 in April but losing 3,000 in March. In contrast, temps added healthy 22,000 jobs in February.

ADP and claims soften ADP added a weaker-than-expected 178,000 jobs in May (consensus at 190,000), while April was downwardly revised to a gain of only 163,000, versus the preliminary print of 204,000 private payroll jobs. ADP had averaged 227,000 jobs in each of the previous six months through March, the strongest stretch in four years, so this weakness over the past two months in an important leading indicator bears watching. Moreover, initial weekly unemployment claims fell to 209,000 for the week ended April 21, which was a new 49-year cycle low. But they subsequently rose back up to 223,000 for the survey week that ended May 12 for this important labor-market leading indicator.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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