US job growth exceeded expectations in May, providing positive signs for the economy.
Emerging from the shadow of covid
The Labor Department’s employment report revealed that non-farm payrolls increased by 339,000 jobs last month, surpassing the forecasted 190,000. This indicates a strong labor market and suggests that the country is far from a dreaded recession. Furthermore, the data for April was revised upward, showing a higher payroll increase of 294,000 jobs compared to the previously reported 253,000. This means more people working, providing for their families, and putting bread on the table, which is always a net positive.
Despite the solid job growth, however, the unemployment rate rose to 3.7% in May from a 53-year low of 3.4% in April. However, economists attribute this increase to more people actively seeking employment rather than leaving the labor market completely, which can be seen as a positive sign of confidence in the job market.
One area of relief for the Federal Reserve is the moderation in wage growth. Average hourly earnings rose by 0.3% in May, slightly lower than the 0.4% increase in April. This indicates that wage pressures are subsiding, which could alleviate concerns about rising inflation. The year-on-year increase in wages also decreased to 4.3%, down from 4.4% in April. Before the pandemic, annual wage growth averaged around 2.8%, highlighting the recent upward trend.
Economic green shoots
The report highlights the resilience of the labor market despite certain pockets of weakness. While the technology sector faced layoffs due to over-hiring during the Covid-19 pandemic, other sectors such as healthcare, education, and the services industry are experiencing accelerated job growth. This can be attributed to retirements and an increased demand for services. Notably, the leisure and hospitality sector is catching up after facing challenges in finding workers over the past two years, which indicates increased disposable income from people and a confidence in social activities after the dark times of lockdown.
The strong demand for workers is evident from the high number of job openings. According to recent data from the Labor Department, there were 10.1 million job openings at the end of April, with 1.8 vacancies for every unemployed person. This pent-up demand for workers further supports the expectation of continued job growth throughout the year.
Outlook and analysis
Financial markets are anticipating that the Federal Reserve will maintain its current policy rate at its upcoming meeting. As of now, there is a more than 70% chance of no interest rate hike, according to CME Group’s FedWatch Tool. The Federal Reserve has already raised its benchmark overnight interest rate by 500 basis points since March 2022, and a pause in rate hikes would provide some relief to the economy.
In summary, the May employment report showcases stronger-than-expected job growth, indicating a resilient labor market. The moderation in wage growth eases concerns about inflationary pressures. While certain sectors face challenges, overall job openings and demand for workers remain high. The Federal Reserve is likely to keep its policy rate unchanged, providing stability for businesses and the economy as a whole.
Taken together, it is a mixed but largely positive outlook for economic growth that, despite some blips, shows the overall U.S. economy heading in the right direction.
