May Employment Report

KEY DATA: Payrolls: +280,000; Private Sector: +262,000; Revisions: +32,000; Unemployment Rate: 5.5% (up 0.1 percentage point); Hourly Wages: 0.3%

IN A NUTSHELL: “It’s time the Fed faces the reality that businesses aren’t hiring lots of workers because the economy is weak.”

WHAT IT MEANS: The soft economy was then; a much better economy is now. It really looks like temporary factors slowed first quarter growth. Nothing says “good economy” more that strong job growth and that is precisely what we got in May. Indeed, the details of the report were almost universally good. On the payroll side, job increases were pretty much across the board. About the only real weakness was due to the problems in the oil patch. Between direct cut backs in mining and indirectly through reductions in manufacturing industries such as fabricated metals and machinery, the energy sector caused payrolls to fall by over 20,000 workers. With oil prices having rebounded somewhat, those cuts should fade. Meanwhile, the services sector is hiring like there is no tomorrow. Temporary help companies are seeing more business and that may be due to the inability of firms to find suitable workers. Even the government is back in the job creation business and not all of the gains were in education.

On the unemployment side of the report, the modest uptick in the unemployment rate can be discounted. In April, the rate was 5.44%. In May, it was 5.50%. An increase that small is not significant. More importantly, the labor force rose solidly and the labor force participation rate increased. Over the year, the participation rate has actually gone up, so it is hard to argue the 0.8 percentage point drop in the unemployment rate over the year is anything but real.

On the wage side, a portion of the report that the Fed members have been paying close attention to, average hourly wages rose solidly and are now up 2.3% over the year. That is nothing spectacular, but it is accelerating, which is what the Fed wants to see. With aggregate hours increasing sharply, it looks like May personal income will be up big-time.

MARKETS AND FED POLICY IMPLICATIONS: One month of strong job gains doesn’t make the Fed hike in June, but it sure does raise the ante of a move sometime soon. The Fed members believe that they need some cover to raise rates even though most of them feel that they have overstayed their welcome at 0%. With job growth coming back and wages and total compensation on the rise, the conditions are nearly in place for the long-anticipated start of the process of rate normalization. I suspect the FOMC will note in the June 16-17 statement that it would like to see some confirmation of the improving growth. We get another jobs report before the July 28-29 meeting and given that the three-month average of 207,000 jobs created is probably below trend, don’t be surprised if the June report is strong as well. That would put pressure on the members to begin tightening right away. Chair Yellen said she would not be limited by the press conference schedule (there is none set for July), but it is likely she would want to face the press.   A September hike looks to be in the cards.