May Employment Numbers: Strong Across-the-Board

Jun 01, 2018

The May Employment Report beat on the headline jobs growth number (223,000 vs. 190,000 expected) and this time most other metrics joined in the headline beat painting it as a solid report across-the-board.  A slight boost in wage growth (2.7%YoY vs. 2.6% expected) will hearten the Phillips Curve proponents on the Fed but the gain still remains shy of the 3.0%-3.5% pre-crisis levels. After a two-tenths decline in April the unemployment  rate dipped again to a new cycle low of 3.8% meeting the Fed’s year-end forecast already. In summary, this solid jobs report clinches a 25bps rate hike at the June 13 FOMC meeting and the modest uptick in wage gains indicates some tightening in the labor market is showing up in pay checks in the form of higher wages. In the end, this report keeps the Fed’s planned three-hikes-in-2018 scenario in place, but continued increases in wage gains and/or inflation will be needed to get to a fourth hike this year.  Currently, the 10-year note is down 13/32nds in price to yield 2.91%. That level is pushing at the 2.76% -2.91% range that has been in place this week. 2.91% is also the 50-day moving average which should provide some support.


  Economic News


For the month, 223,000 jobs were created beating the 190,000 expected, and well above the 159,000 jobs created in April (downwardly revised from 164,000).  With the government sector subtracting 5,000 jobs, private payrolls increased by 218,000 versus 190,000 expected and 162,000 in March (revised down from 168,000). Despite the downward April revisions, prior two-month revisions added a net of 15,000 new jobs from prior prints. Digging into the job categories, 171,000 service-providing jobs were added in the month led by health-care, retail, and professional services all adding 31k each.  Meanwhile, 47,000 goods-producing jobs were added with construction (+25k) and manufacturing (+18k) leading the gains in that category. 


Wage gains perked up some in May with both a monthly and year-over-year beat indicating some tightening in the labor market is finally leading to greater pay increases. Average hourly earnings for May increased 0.3%, beating the 0.2% expectation and  ahead of the modest 0.1% gain in April.  In addition, year-over-year earnings rose to 2.7% after four straight months at 2.6%.   Average weekly hours remained unchanged from March at 34.5 hours. 


The stable hours worked is a change from the beginning of the year where a decline in January was partially responsible for a bump in average hourly earnings that created something of a false dawn that wage gains were beginning to ramp higher. That was not the case as YoY gains fell from January’s 2.8% to 2.6% since than, until this latest report.  The 2.7% YoY wage gain, however, remains in the 2.5% - 2.7% range of the past year but still shy of the 3.0% to 3.5% pre-recession annual rate. The Fed, and workers, want to see the wage gains move back to that pre-recession rate before concluding the labor market is truly at full employment.  


Meanwhile, the unemployment rate dipped a tenth to 3.8% setting a new cycle low and that’s after dropping 2/10ths to 3.9% in April. Pre-release expectations were for the rate to remain at 3.9% for the second straight month after six months at 4.1%. The prior month’s 2/10ths drop was partially due to a 236,000 decline in the labor force with most of that drop reflected in a drop in the number of unemployed and only a slight 3,000 increase in new jobs. This time, the labor force was largely unchanged but the ranks of the unemployed dropped by 281,000 with a 293,000 increase in employed. That’s a clearly positive drop in the unemployment rate and another indication of a tightening labor market.


The broader underemployment rate (unemployed plus part-timers seeking full-time work, plus the marginally attached divided by the labor force) dropped 2/10ths to 7.6% also setting a new cycle low.  With the labor force remaining mostly unchanged from April (which is the denominator in the underemployment rate) the dip in the rate was due to a decrease of 281,000 in the ranks of the unemployed, a decrease of 37,000 in part-time workers with those decreases offset by an increase of 93,000 in the ranks of the marginally attached (those willing to work but not actively looking). This rate bottomed in the 7.9% - 8.2% range prior to the recession so this is another indication we are near the full employment zone. 


The labor force participation rate (labor force divided by civilian population) dipped from 62.8% to 62.7%. The average for all of 2017 was 62.7%. The downtick in May is a direct result of the aforementioned unchanged reading of the labor force while the civilian population gained 182,000 people.  As we’ve said in prior reports, the current reading pales in comparison to the 66% level that prevailed pre-crisis. On the face of that it may seem to indicate some remaining labor force slack but getting anywhere close to that pre-crisis level in the near future seems almost impossible given demographic forces of increasing boomer retirements versus modest population gains. It may be that the 62.7% to 63.0% participation rate range will be the new full employment normal given the aging demographic of the population. 


In summary, this is a solid report that will provide the final bit of ammo for the expected 25bps rate hike at the June 13 FOMC meeting. The uptick in both monthly and year-over-year wage gains seems to indicate labor market slack is being removed but the YoY wage gains still remain well under the pre-crisis rates. In all, this report keeps the Fed’s planned three-hikes-in-2018 scenario solidly in place, but either a bigger pick-up in wages and/or inflation will be needed to get to a fourth hike. 



Market Update  Average Hourly Earnings YoY


Average hourly earnings has become perhaps the most important metric in the monthly employment reports and the May release is a good case in point. With the unemployment rate dipping to a new cycle-low of 3.8%, wage gains rose above expectations at 0.3% month-over-month compared to 0.1% in April.  Year-over-year the figure rose to 2.8%. The graph shows the trend in YoY earnings for non-supervisory workers (since records exist back to the mid-60’s). As shown, the current wage gains, while improving, pale in comparison to prior periods with the average over the 50-year period at 4.2% and that will work to keep inflation from ramping materially higher, and should keep the Fed from adopting a more aggressive hiking schedule.


Average Hourly Earnings YoY



Agency Indications  Market Rates


Market Rates



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