The May U.S. Employment Report was excellent, exceeding expectations on
all fronts. Establishment payrolls rose 223,000; the unemployment rate fell
further to 3.8 percent, far below estimates of “full employment;” and wages
rose 0.3 percent, exceeding expectations. This report sets an encouraging tone
for strong economic growth.
Job gains have averaged 207,000 per month so far this year, higher than
its 2016 (195,000) and 2017 (182,000) average.
The 3.8 percent unemployment rate tied April 2000 for the lowest rate
since December 1969. The Household Survey registered a 281,000 decline in
unemployed — it has fallen 641,000 in the last three months. The Fed
estimates the natural rate of unemployment to be 4.5 percent; the CBO 4.6
Average hourly earnings rose 0.3 percent month over month, lifting its
year on year change to 2.7 percent. Reports of labor shortages are becoming
more widespread, and wage pressures are gradually increasing. I expect this
upward pressure to become more pronounced as labor markets tighten further and
if nominal GDP and productivity growth continue to pick up.
Job growth above 200,000 at this mature stage of expansion is
impressive, pointing to a larger-than-expected potential labor supply and
business optimism that underlies the quickened pace of hiring and investment.
This year has been turbulent for financial markets, and there are a slew of
global trade and geopolitical uncertainties, but firms are looking past the distractions
and focusing on fundamentals. The resurgence in business sentiment in May
supports the strong jobs report.
By industry, the service-providing sector dominated as usual, with a
171,000 increase, but the goods-producing sector also added a strong 47,000
jobs. Construction payrolls rose by 25k, increasing by a total of 138,000 this
year. Labor shortage complaints have been the loudest in construction, and
wages are rising very quickly there as a result.
Manufacturing payrolls rose by 18,000 and mining employment increased by
6,000 as higher oil prices continue to drive hiring and investment in the
sector. Retailers are adding jobs again — after reducing payrolls by
29,000 in 2017, they have increased it by 109,000 thus far this year, with an
increase of 31,000 in May.
Average hourly earnings surpassed forecasts this month, even overcoming
a downward bias from a calendar quirk. To be sure, 2.7 percent year on year
wage growth is not spectacular, but is clearly heading up. A relatively
high net share of small businesses, 20 percent, plans to raise worker
compensation in coming months.
Surprisingly, aggregate hours worked, the earliest proxy of broad
economic activity, increased by only 0.2 percent month over month, as the
average workweek remained unchanged at 34.5 hours, pointing to only steady
The combination of the job gains and pickup in wages implies strong
growth in disposable incomes and will support consumer confidence. Indeed,
aggregate weekly payrolls that combines earnings, hours worked, and employment
rose by a solid 0.5 percent month over month and should support May’s
The Household Survey was equally strong, as its measure of employment
increased by 293,000 and unemployment dropped 281,000. The labor force participation
rate for the prime working-age cohort actually fell to 81.8 percent, retracing
its year-to-date gains. The number of voluntary job leavers continued to
increase, signaling strong confidence in job-finding prospects. Sustained
increases in labor market churn will place upward pressure on wages.
This is the last employment report before the Fed’s June 12-13 FOMC
meeting and it keeps the Fed on track to increase its Fed funds rate
target. I expect the Fed to raise rates at each quarterly meeting in
2018: with the very low unemployment rate, solid growth of real GDP (I
forecast 3.7 percent for Q2), and inflation near two percent the Fed will have
a hard time justifying any pause in its policy normalization.
for the original article from Economics 21.