May Employment Report

INDICATOR: May Employment Report

KEY DATA: Payrolls: +217,000; Private: 216,000; Unemployment Rate: 6.3% (unchanged); Hourly Wages: +0.2%

IN A NUTSHELL: “A better than expected employment report reinforces the belief that the labor market is strengthening and the economy is picking up steam.”

WHAT IT MEANS: After the robust April report, there were worries that the large job gains were just a rebound from the restraining effects of the winter and we could get a very disappointing payroll increase in May. The ADP estimate only added to those concerns. Well, that didn’t happen. As expected, the May job gains were well below the 282,000 posted in April, but they were still quite solid. Indeed, the three-month average of 234,000 was the strongest in nearly nine years. That was in 2005 when the housing boom was going strong. The increases were largely across the board, with only state and federal governments and the motion picture industry posting large losses. I get it that postal employment is being reduced, but why over 9,000 motion picture employees were cut is beyond me. That was the only oddity in the report. Durable goods payrolls rose but nondurables were down. Construction was okay, not great. The services sector was solid and the rise in temporary workers was not particularly large. The details are frequently really weird but this was not one of those reports. A benchmark was passed in May: Total payrolls finally exceeded their pre-Great Recession peak despite the fact that government remains over 900,000 below its previous high.

On the unemployment front, the rate remained at 6.3%, which was somewhat of a surprise. After declining sharply in April, a modest uptick would have not been unusual. And the stability occurred despite a rise in the labor force and no change in the participation rate. Last month, the drop was discounted by some (not me) because of the shrinking labor force and participation rate. Those changes were just the usual volatility in the data. But there still remains a lot of slack in the labor market as wages rose at a relatively modest pace that is only minimally outstripping inflation. That explains a lot of the sluggishness in the economy.

MARKETS AND FED POLICY IMPLICATIONS: This was a very good report that was a surprise only after the ADP numbers came out. Consensus was about 210,000, I was at 224,000 and the number split the difference. Most people, including myself, had the unemployment rising to 6.4%. So this was basically right on expectations. As such, it should not create much excitement in the markets unless you actually sit back and think about it. If we keep creating 225,000 to 250,000 positions a month, a level I think is easily attainable, the unemployment rate will consistently decline. By year’s end, we should be below 6% and moving close to full employment, which is roughly 5.5%. That should be viewed as really good news as it would trigger the needed wage increases. I suspect that firms, which have not had to worry about compensation for years, will fight raising salaries. But that could only defer the judgment day and actually raise costs by increasing turnover. The labor market is not strong by any means, but this report supports the view that it is getting there and probably faster than most believe.