May Employment Report and Manufacturing Activity and April Construction

KEY DATA: Jobs: +223,000, Private: 218,000; Revisions: +15,000; Unemployment Rate: 3.8% (down 0.1 percentage point); Wages (Over-Year): +2.7%/ ISM (Manufacturing): +1.4 points; Orders: +2.5 points/ Construction: +1.8%

IN A NUTSHELL: “Manufacturing is strong, construction is soaring and firms are hiring: What more is there to say?”

WHAT IT MEANS: Another Employment Friday, another good jobs report. Payroll gains in May were greater than expected and the revisions added even more jobs to the previous two months total. So this was a really good report. The job increases were across the board with nearly 68% of the private sector industries hiring more workers. That is just about as good as it gets. A decline in temporary help may be a signal that firms are moving part-timers to full-time status in order to fill open positions and retain workers. On the unemployment front, the rate declined to a level seen only once since December 1969. While the labor force barely increased, it is up sharply over the year, indicating that people are flocking back into the market. Strong wage gains are helping. Wages rose solidly over the month and over the year, the increase is starting to approach 3%, which would signal wage inflation is becoming an issue.

The ISM manufacturing report also was up more than expected and the details were all really good. Orders are soaring, backlogs are building and production and hiring are expanding to meet the growing demand. The only concern in the report was that a large percentage of the firms are paying more for their goods.

Construction activity jumped in April, powered by robust a residential construction segment. Nonresidential was up more moderately. The increase would have been greater if commercial activity hadn’t slowed. I suspect that will pick up as firms start using at least some of their tax breaks to fund expansion.

MARKETS AND FED POLICY IMPLICATIONS: The volatility in the employment report sometimes creates outsized numbers that are not supported by other data. Today, we got a strong employment report that was supported by the other data. The economy is in great shape and it is hard to find any weakness. But there is no such thing as a free strong economy: Inflation looks like it is finally starting to show up. Wage gains are rising, despite the fact that the hourly wage number in the report is a terrible measure of inflation. It’s a weighted average and it is actually possible that the average wage could fall even if every individual industry’s wage rose. That is the wonders of the math. So, looking at the weighted average tells us very little, though everyone seems to want to use it. That said, wage pressures are building. In addition, consumer price increases are accelerating and measures, such as the ISM price index, show that firms are paying more for their inputs. I point this out because while investors may be jubilant, the Fed is meeting in less than two weeks and the members may not be as exuberant. The monetary policymakers are facing an economy that is strong and supportive of the rising wage and price pressures we are seeing. Thus, expect another rate hike to be announced on June 13th. I would be surprised and disappointed if, given the solid economic and inflation data, hints are not given that four rate increases this year are likely.