According to a report released by the Labor Department on Friday, the U.S. economy exhibited robust job growth in May, surpassing expectations despite facing multiple challenges. Nonfarm payrolls in both the public and private sectors experienced a notable surge of 339,000, surpassing the Dow Jones estimate of 190,000. This marks the 29th consecutive month of positive job growth.
However, the unemployment rate rose to 3.7% in May, exceeding the estimated rate of 3.5%, despite the labor force participation rate remaining unchanged. Although this increase represents the highest jobless rate since October 2022, it remains close to the lowest level seen since 1969.
Average hourly earnings, a crucial indicator of inflation, rose by 0.3% for the month, in line with expectations. On an annual basis, wages increased by 4.3%, slightly below the estimated rate by 0.1 percentage point. Additionally, the average workweek experienced a minor decline of 0.1 hour, settling at 34.3 hours.
The financial markets responded positively to the report, with the Dow Jones Industrial Average surging more than 400 points during early trading. Concurrently, Treasury yields also rose as market participants absorbed the favorable job numbers along with a debt deal in Congress.
Becky Frankiewicz, President and Chief Commercial Officer of Manpower Group, commented on the resilience of the U.S. labor market, stating, "The U.S. labor market continues to demonstrate grit amid chaos – from inflation to high-profile layoffs and rising gas prices. With 339,000 job openings, we're still rewriting the rule book, and the U.S. labor market continues to defy historical definitions."
The substantial increase in hiring observed in May closely aligns with the 12-month average of 341,000, underscoring the job market's remarkable stability despite the deceleration of the economy. Job creation in the month was predominantly led by the professional and business services sector, which saw a net gain of 64,000 new hires. The government sector also contributed significantly, adding 56,000 jobs, while the healthcare sector contributed 52,000 jobs. Other notable gainers included leisure and hospitality (48,000), construction (25,000), and transportation and warehousing (24,000).
Despite the substantial increase in job numbers, the rise in the unemployment rate can be attributed largely to a sharp decline of 369,000 in self-employment. This decline contributed to an overall drop of 310,000 individuals counted as employed in the household survey, which is considered more volatile than the survey of establishments used for the headline payroll figures and is used to calculate the unemployment rate.
Paul Ashworth, Chief North America Economist for Capital Economics, noted that the only notable weakness in the report was the decline in average weekly hours worked to 34.3, from 34.4, marking the lowest level since the nadir of the Covid pandemic in April 2020.
An alternative measure of unemployment, which includes discouraged workers and individuals holding part-time jobs for economic reasons, saw a slight increase to 6.7%.
The release of May's job numbers occurs during a challenging period for the economy, with many experts still anticipating a recession later this year or in early 2024. Recent data reveals that consumers continue to spend, although they are increasingly relying on credit cards and dipping into savings to finance their purchases. The resilient labor market has provided support for consumer spending, with job openings surpassing 10 million in April, indicating that employers are struggling to fill vacant positions.
While a major concern related to the debt ceiling has been resolved through a deal reached by warring factions in Washington, there are still other challenges ahead. The Federal Reserve has implemented ten benchmark interest rate hikes since March 2022 in an effort to address persistent inflation. However, some policymakers have recently indicated a willingness to pause the rate hikes in June to assess the impact of the tightening policies on the economy.
Despite this, the likelihood of a June rate hike increased following the release of the jobs report, with traders briefly pricing in around a 38% chance of another quarter-point increase before the probability fell back to approximately 26%.
Additional data points indicate that the manufacturing sector of the economy is experiencing a contraction, while the larger services sector has maintained expansion. The ISM manufacturing index released on Thursday also revealed a decrease in prices, which is seen as a positive sign for the Federal Reserve.
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