May Jobs Report Implications For The Economy And Markets

The much anticipated May jobs report left markets with more questions than answers. Based on a firm survey and considered the gold standard, the nonfarm payrolls jobs report was broad-based and more robust than expected, with a gain of 272,000 jobs for the month. Based on a polling of households and a smaller sampling than the payrolls establishment survey, the household survey posted a significant decline in employment. This month’s data has widened the substantial gap between the payrolls report and the household measures of job growth that began in late 2023. So, are things getting better or worse in the labor market?

Through the help of some other data points, the truth is probably somewhere in the middle. The rise in immigrant employment is almost certainly undercounted in the household survey. However, as this article will illustrate, other data provide evidence that the labor market is cooling.

While wage growth was hotter than expected at 4.1% year-over-year and will feed fears of inflation pressures, the hours worked held steady and remained only slightly above the 4-year low.

Based on the decline in employment in the household survey, the unemployment rate ticked up to 4.0% from 3.9%. While this is still very low by historical standards, unemployment has crept up from the 3.4% low in January 2023.

Importantly, even if one wholly believes the weakness in the household survey, the increase in the unemployment rate is not yet signaling an imminent recession. The “Sahm Rule,” which has an unblemished track record for predicting recession when the unemployment rate rises sufficiently over the low, has not yet been triggered.

The recent April JOLTS report strengthens the case for a cooling job market, as job openings remain historically high but have been in a downward trend since March 2022. A subcomponent of the JOLTS data called the Quits rate, which measures voluntary separations from employment, is at the high end of its typical historical range but has declined since April 2022. The Quits rate has been significantly correlated with wage growth over time, so this month’s higher-than-expected wage growth seems likely to ease in the month ahead.

The highest frequency jobs data, initial jobless claims, which measure initial filings for unemployment benefits, has been increasing since January. Again, these claims for unemployment compensation are below long-term “normal” historical levels but moving higher.

The bottom line is that the payrolls report indicates that the labor market is not collapsing, and thus, U.S. economic growth should also hold up. Following the jobs report, the Atlanta Fed’s second-quarter GDP estimate was boosted to 3.1%.

In reaction to the less friendly wage data and firmer economic growth expectations, the 2-year and 10-year bond yields have risen to 4.43% and 4.89%, respectively.

Relatedly, markets have now priced in a 54% chance of a Federal Reserve (Fed) easing in September, down from over 80% just a few days ago. Fed Fund futures are still looking for one-and-a-half cuts of 25 basis points (0.25%) in 2024.

In the wake of the jobs report, Wednesday’s consumer inflation (CPI) report and Federal Reserve meeting take on more significance. The Cleveland Fed and consensus estimates expect the CPI to be around 3.4% year-over-year, which would be unchanged from the pace of the previous month. While the Federal Reserve is sure to leave short-term interest rates unchanged, Chair Powell’s comments and the updated projections from the committee will be crucial in interpreting how they view the divergence in the labor market data.

Stocks were surprisingly resilient despite the less helpful wage inflation news, with the S&P 500 down slightly on payroll’s Friday, but stocks held onto a 1.3% gain for the week. While the payroll jobs growth was more substantial than expected, including wage growth, enough hints of softening remain to keep the odds of at least one rate cut from the Fed as a high probability. Notably, the window is still open for the economy to be strong enough to support corporate earnings but easing sufficiently to eventually allow the Fed to make monetary policy less restrictive. At the Fed meeting next week, it will be crucial to hear if Chair Powell agrees with this assessment or if further adjustments need to be made to meet market expectations.