May Payrolls Bring More Mixed News

June 07, 2024

We believe that while this print is not a particularly good one for those seeking greater accommodation from the Fed, the emphasis will likely continue to be on inflation.

Following a lighter April report, non-farm payrolls rebounded in May as the U.S. economy added +272k jobs versus consensus for a +180k gain. The strong private sector gains were concentrated in health care, leisure & hospitality, and professional, scientific & technical services, which added +68k, +42k and +32k, respectively. Government jobs, despite expectations by some that fiscal impulse would be waning as we move through the year, increased by +43k, and retail hiring reaccelerated in the month to +13k; all other major industries were essentially flat. Offsetting the strength were downward revisions to both March and April data, with March’s print revised down to +310k from +315k and April’s already muted report revised lower by -10k to +165k.

Even with the solid monthly gains, the unemployment rate ticked higher for the second month in a row to 4.0% from 3.9% as the participation rate fell to 62.5%. Divergence between the establishment survey, from which the non-farm payrolls data is derived, and the household survey was evident again this month as the household survey indicated the ranks of employed people decreased by -408k and the unemployed increased by +157k. The numbers of people employed part time for economic reasons, those currently not in the labor force but who want a job, and those marginally attached to the labor force were once again flat. In our view, this divergence between the two surveys could act as fodder for both hawks and doves.

Fewer employed persons plus robust payroll gains equals an increase in average hourly earnings, which rose by +0.4% month-over-month and +4.1% year-over-year. As wages tend to be quite sticky, any increase is generally passed through fairly quickly to end consumers, complicating the desired shift to lower inflation. This reacceleration in wages, while understandable, is another brick in the wall that we believe stands between the Federal Reserve (Fed) and its first rate cut announcement.

In short, we believe that while this print is not a particularly good one for those seeking greater accommodation from the Fed, the emphasis will likely continue to be on inflation. The impact of solid employment numbers on the Fed’s decision-making is not insignificant, however. In our view, a solid labor market is another indication that the Fed can be patient and wait for signs that the economy is weakening meaningfully. Equities were lower to start the day, but have rallied through the session while bond yields rose in response. The CME FedWatch tool indicates an almost 50% chance now that the Fed stays on hold past the September meeting.


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