The U.S. economy added 172,000 jobs in May, well above the consensus estimate of 85,000 and the 115,000 jobs created in April, signaling a reacceleration in labor market growth. Additionally, the unemployment rate remained unchanged at 4.3%, indicating that labor market conditions continue to be more resilient than many economists had anticipated and remain near the lower end of their historical range. The labor force participation rate was also unchanged at 61.8%. The Investment Committee believes that ongoing tension in the Middle East could weigh on U.S. economic growth over the longer term, as higher oil and gasoline prices reduce consumers’ discretionary spending power. Regardless, May’s employment data suggests that the labor market remains relatively stable, providing policymakers with continued flexibility as they consider future adjustments to monetary policy.
This morning’s non-farm payroll results come after Wednesday’s ADP report, which showed job gains of 122,000, slightly higher than the 120,000 consensus and consistent with April’s gain of 109,000. Unlike prior months, job growth spread further than just healthcare, and gains were more broad based. Education and health services gained 57,000 jobs, trade, transportation, and utilities added 36,000, professional and business services contributed 11,000, while construction and leisure and hospitality both rose by 8,000. Information services lost 9,000 and natural resources and mining fell by 3,000. Companies with fewer than 50 employees led gains with 67,000 new hires, while companies with 500 or more employees added 40,000, and medium sized firms added 15,000. Based on salary, annual pay rose by 4.4% for those staying in their jobs, while those that changed jobs observed a 6.5% increase.
The labor market continues to surprise to the upside. Over the past three months, the average monthly increase in nonfarm payrolls was 157,000 jobs, based on monthly gains of 115,000, 185,000, and 172,000. This compares favorably with the same three-month period a year ago, when the average monthly increase was 63,000 jobs. At the same time, concerns persist that higher oil prices could add further pressure to already elevated inflation. As a result, some Federal Reserve officials have adopted a more cautious stance toward monetary policy.
The fed funds futures market is currently pricing in a greater likelihood of an interest rate increase than a rate cut by year-end. Despite political pressure to lower interest rates and the prospect of a new Federal Reserve Chair, the Investment Committee believes a rate cut in the coming months is unlikely unless labor market conditions weaken significantly from current levels and inflation descends back towards the longer term 2.0% target rate.