Tale of two labor markets
A hot headline increase of 339,000 jobs in May but colder details put Fed in wait-and-see mode.
For the 14th consecutive month, the headline figure of the monthly jobs report arrived ablaze. Nonfarm payrolls in May soared by a stronger-than-estimated 339,000 jobs, compared with the expected consensus increase of 195,000 jobs. At 275,000, our forecast at Federated Hermes was even higher. In addition, the Labor Department revised March and April upward by a combined 93,000 jobs. Other data was also hot. The ADP Employment Report indicated private employers added 278,000 jobs in May, JOLTS surprisingly leapt back above 10.1 million in April and initial weekly jobless claims now have slipped by 6% over the past two months to a muted 232,000 last week.
But on the other hand... When we pop the hood on the overall jobs market, however, the picture is decidedly mixed, not unlike April’s labor market reports. Household employment, the metric on which the unemployment rate (U-3) is based, plunged. It shed 310,000 jobs in May following gains of 139,000 in April, 577,000 in March and 894,000 in January. That helped to push U-3 up from a 53-year low of 3.4% in April to 3.7% in May, the largest 1-month increase since April 2020. Hours worked slipped a tick in May to 34.3, which is expected as employers typically cut hours before they start to cut jobs. With more than 80,000 layoffs in May, the Challenger Job Cuts Report rose nearly 20% month-over-month (m/m) and almost 287% year-over-year (y/y), with technology terminations accounting for more than a quarter. Average hourly earnings continue to decline, sliding to a gain of 4.3% y/y in May, down from 4.4% in April, 4.7% in February and 4.8% in December 2022.
Fed pause in June? The Federal Reserve has already hiked the fed funds target range at ten consecutive meetings over the past 14 months, bringing it to 5-5.25%. We expect it will leave the range there at its upcoming policy-setting meeting on June 14. But the core Personal Consumption Expenditure (PCE) Index, the Fed’s preferred measure of inflation, rose a tick higher in April to 4.7% y/y. That means next week’s core Consumer Price Index (CPI) print for May will be critical to its decision-making. Depending on the data, it could potentially re-engage with a quarter-point hike at the July 26 meeting. We disagree with the market’s “Immaculate Pivot” argument that policymakers will cut rates at the last three meetings of the year. In contrast, we expect they will remain on the sidelines.
Key labor-market indicators were mixed:
- ADP private payroll survey surged by 278,000 jobs in May, well above consensus expectations for a gain of 170,000 and comparable to April’s increase of 291,000 jobs. Wage growth rose (albeit at a slower pace) 6.5% y/y last month for job stayers and 12.1% for those who changed jobs.
- The lagging Job Openings & Labor Turnover Survey (JOLTS) surprisingly rose 3.5% m/m in April to a 3-month high of 10.1 million job openings, though it is down nearly 16% from a record 12 million job openings in March 2022. There are now 1.8 job openings for every unemployed worker, and 3.8 million voluntary quitters with a 2-year low quit rate of 2.4%.
- Initial weekly jobless claims have slipped from a cycle high of 247,000 in mid-March to 232,000 claims in late May, that equates to a decline of 6%.
- Challenger job cuts leapt in May by another 80,000 layoffs, up 287% from a year ago and up nearly 20% since April. Technology (22,900), retail (9,100) and automotive (8,300) layoffs account for half of the terminations.
Wage inflation and hours worked decline Average hourly earnings eased a tick to a gain of 0.3% m/m in May, which annualizes to a 3.6% gain. Wages rose 4.3% y/y in May, down a tick from a 4.4% gain in April, and down from 4.7% in February and 4.8% in December 2022. In addition, average hours worked slipped to a 3-year low of 34.3 in May, down from 34.4 in April, 34.5 in February and 34.6 in January. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy.
Unemployment and labor impairment rates rise; participation rate flat Household employment plummeted by 310,000 jobs in May, down from gains of 139,000 jobs in April, 577,000 jobs in March, and 894,000 in January. The number of unemployed people rose by 440,000 in May, up sharply from declines of 182,000 in April and 97,000 in March. As a result, U-3 soared from a 53-year low of 3.4% in April to 3.7% in May, the largest one-month increase since April 2020. But the Fed’s own forecast from its March Summary of Economic Projections is that the U-3 will rise to 4.5% by year-end 2023, an increase which could push the economy into recession next year.
The labor impairment rate (U-6) ticked up to 6.7% in May from 6.6% in April and from a cycle low (dating back to 1994) of 6.5% in December. The civilian labor force rose by 130,000 in May, up from a decline of 43,000 workers in April, compared with a strong gain of 480,000 in March. That left the participation rate unchanged at 62.6% in May for the third consecutive month, compared to the pre-pandemic cycle high of 63.4% in February 2020.
K-shaped recovery continues to widen The unemployment rate for high-wage-earning workers rose to 2.1% in May, up from 1.9% in April and September 2022’s cycle low of 1.8%. But it leapt to 5.7% in May for low-wage-earning workers, up from 5.4% in April and 4.8% in March (versus its 30-year low of 4.3% in February 2022). The personal savings rate has risen from a 17-year low of 2.7% in June 2022 to 4.1% in April (but down sharply from 26.3% in March 2021). Consumers are tightening their belts.
Sector details also mixed:
- Private payrolls similarly posted a stronger-than-expected gain of 283,000 jobs in May (consensus at 168,000), and March and April combined were revised higher by 57,000 jobs.
- Government hiring rose by 56,000 jobs in May (49,000 of which was state and local hiring), up from 41,000 in April, versus 60,000 in March, 55,000 in February and 119,000 in January.
- The manufacturing sector lost 2,000 jobs in May, compared with a gain of 10,000 jobs in April and a loss of 12,000 jobs in March. The ISM manufacturing index has fallen into contraction territory under 50 in each of the past seven months to 46.9 in May.
- Construction added 25,000 jobs in May, up from a gain of 13,000 in April, a loss of 9,000 jobs in March and gains of 14,000 in February and 26,000 in both January and December. Mortgage rates more than doubled from 3% to 7.35% over the past year, which slowed the housing market significantly. But they have recently fallen back toward 6%, and the housing market has rebounded.
- Temporary hiring (an important leading indicator of employment trends) gained 8,000 jobs in May for the first time in four months, after losses of 7,000 jobs in April, 3,000 in March and 10,000 in February.
- Retail added 12,000 jobs in May, up from 10,000 jobs in April and a loss of 19,000 jobs at the start of the important spring “Mapril” season in March. That compared with healthy gains of 48,000 in February, 22,000 in January and 27,000 in December.
- Leisure & hospitality added 48,000 jobs in May, up from only 30,000 in April and 46,000 in March. That compares with stronger hiring trends of 57,000 in February, 99,000 in January and 58,000 in December.