- The labour market remains strong, suggesting the slowdown in economic activity will prove temporary.
- May’s nonfarm payrolls rebounded to 280K up from 221K the previous month. The unemployment rate edged up to 5.5% from 5.4%.
- This is the last job market report before the June 17th FOMC meeting and therefore we expect it to shape the view of Fed officials in a meaningful way, supporting a rate hike in September 2015.
Job growth solid, report strong
Nonfarm employment increased 280K in May, up from 221K in April. This was higher than consensus of 226K. The details of the report were strong and suggests that the slowdown in momentum of the labour market in the first quarter was mainly due to temporary factors. March and April were revised upward by a cumulative 32K. The unemployment rate edged up to 5.5% from 5.4% the previous month as more people entered the labour market (397K).
Service-providing employment strong
Turning to the establishment survey, education and health added the most jobs at 74K, followed by professional business services at 63K. Construction saw some moderation in hiring increasing 17K compared to 35K the previous month. Manufacturing (including oil and gas) continue to show modest job gains, likely as a result of the impact of the strong dollar which affects the export manufacturing industry and the lower oil prices, which are taking their toll on the energy-related industry.
Wage growth firming
Wage growth continued to pick up. Average hourly earnings increased 0.3% in May up from 0.1% the previous month. On a year-on-year basis, wage growth was 2.3%, edging up from 2.2% the previous month. Other measures of wage growth including unit labour costs and the employment cost index have been trending upwards more convincingly. We think that wages will continue to strengthen as the labour market tightens further.
FOMC should prepare for liftoff in next meeting
For the Fed we judge that this report will give more confidence to the FOMC that the economy is on the right track, setting the scene for a rate hike in September. This is the last job market report before the June 17th FOMC meeting and therefore we expect it to shape the view of Fed officials in a meaningful way. In general, FOMC members, according to the minutes, see labour market conditions improving.
Chair Yellen in her most recent intervention has said that if the labour market strengthening is confirmed and inflation readings continue to improve, liftoff would likely come before the end of the year. We think the labour market will improve further.
Other labour market indicators broadly improving
The Fed looks at a large set of indicators to determine the health of the labour market. The number of job openings has risen impressively, while more workers are quitting their jobs, signalling confidence in the ability to find a new job. Meanwhile jobless claims, measuring unemployment benefits, continue trending at historical lows. In the past few months, the participation rate is improving at a snail pace, increasing to 62.9% from 62.8%. We think that demographic forces are exerting downward pressure on the participation rate, so this slight improvement could be seen as a cyclical increase.