May Payrolls Not Too Hot, Not Too Cold

Economic Blog Posted by lplresearch


Before diving into today’s jobs report for May, it will be a useful exercise to recall the curveball that April’s report threw at investors.

One of the more hotly contested topics investors have been debating recently is what to make of the jobs report released one month ago, where the consensus expectation was for 1,000,000 new jobs and we only got 266,000 (since revised up to 278,000). On the one hand, data releases are volatile by nature and it is possible that the large miss could have been broadly dismissed as a “one off” among a package of otherwise very healthy economic data. On the other hand, it did confirm anecdotal evidence of difficult hiring conditions facing companies and reinforced the notion that some workers may be reluctant to return to the workforce for a whole host of reasons. Moreover, if the April report really did unearth new evidence of a weaker-than-expected jobs market in this latter scenario, should we view the effect as temporary or does it have staying power that could spell new trouble for the overall economic recovery?

Against this backdrop, investors were hoping that today’s May jobs report would go a long way towards providing some definitive answers to these important questions.

It did not. But, that might actually be a good thing. Here are some key takeaways:

  • The U.S. Bureau of Labor Statistics’ May employment report revealed that the domestic economy added 559,000 jobs in May, slightly below Bloomberg-surveyed economists’ median forecast for a gain of 675,000. The prior two months also received net positive revisions of 27,000 jobs.
  • The unemployment rate fell more than expected to 5.8%, though that was paired with a disappointing drop in the labor force participation rate, which moved from 61.7% to 61.6%.
  • Average hourly earnings rose 0.5% month over month, again signaling lower-wage workers did not rejoin the workforce to the degree expected. More new lower-wage jobs would be expected to put more downward pressure on wage increases.

“It is hard to view 559,000 added jobs as a disappointment, but it does leave something to be desired,” explained LPL Financial Chief Market Strategist Ryan Detrick. “There is strong potential for job prints in excess of one million over the coming months, but the truth is as strong as the economy is right now, the employment backdrop is clearly lagging what we were all expecting just a few months ago.”

As seen in the LPL Chart of the Day, May’s jobs number did jump above April’s disappointment, but still came well short of making a fresh new high for 2021.

View enlarged chart.

Where do we go from here? The US economy is still 7.6 million total payrolls shy of its peak prior to the recession, and given the magnitude of that number, we still believe there is the potential for strong upside surprises for at least the next several months. Several catalysts should also lend a helping hand in the near future. Enhanced unemployment benefits may be deterring lower-wage workers from returning to the labor market, as they reduce the relative attractiveness of a paycheck from an employer. In the last month, about half of all states have started eliminating these added benefits in order to reduce the disincentive. We believe this should show up in the data starting with the June employment report. Also, schools might be closing for the summer, but daycare centers are reopening more broadly, freeing parents up to find jobs. Warmer weather, ever-improving vaccination trends, and increasing comfort reengaging in normal activities should all play their parts as well.

The labor market will always be inextricably linked to the inflation outlook, this cycle perhaps more than past cycles, and for many that is the real story today. The Federal Reserve (Fed) has made it clear it will tolerate near-term inflation overshoots in order to achieve “substantial further progress” towards its employment goals before it begins taking measures to combat higher inflation. Recent hotter-than-expected inflation reports have increasingly turned the spotlight towards the Fed’s timeline for reducing their asset purchases, which, given their stated position, will depend on strong payroll reports. As such, we find ourselves (to a degree) in a “good news is bad news” scenario, as strong labor market readings could hasten the Fed’s timetable to begin normalizing monetary policy.

Today’s report likely did little to convince the Fed that the labor market is closer to meeting its “substantial further progress” goal on employment, and therefore, all else equal, will not compel them to consider reducing asset purchases sooner rather than later. There is much ground still to be made up in the labor market, and we believe the Fed will need to see a string of strong reports, likely in the one million range, before it begins to take action. From a Fed intervention standpoint, today’s employment report likely found a sweet spot, and the early indications are that equity markets are breathing a sigh of relief.

For a deeper dive into the inflation picture, check the blog on Thursday, June 10, when data for the Consumer Price Index (CPI) measure of inflation is set to be released.


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