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RAINBOWS AND UNICORNS WITH A DASH OF DEBBIE DOWNER: A MAY EMPLOYMENT REPORT DEEP DIVE

The May employment report was simultaneously lackluster and stronger than expected, suggesting a labor market that's neither softening nor booming.

The U.S. economy added 172,000 jobs last month, USNFAR=ECI, more than double the 85,000 consensus.

To sweeten the pot, the number actually marks a 3.9% drop from April, which was upwardly revised to 179,000 from 115,000.

This marks the fifth upside surprise in the past 12 months, and the fourth reading to land north of the 100,000 mark over the same time period.

Indeed, for the curmudgeons in our midst, the report appears to support the case that we could actually see an interest rate hike from Warsh & Co by the time the calendar rolls around to 2027.

Financial markets are currently baking in a 42.8% likelihood of a rate hike at the conclusion of the Fed's December meeting, up from 38.2% yesterday and 26.1% one month ago, according to CME's FedWatch tool.

Drilling below the headline, a 52,000 increase in government payrolls helped boost the upside, and the often lower-wage services sector was responsible for 76.7% of the 120,000 private sector job adds, down from the 91.9% share in April. Goods-producing and construction sectors added 28,000 and 17,000 jobs, respectively. The manufacturing sector unexpectedly added 7,000 workers, blowing past the predicted 2,000 gain.

The report also gave markets their first glimpse of June inflation, showing average hourly wages heated up to 0.3% on a monthly basis, but cooled down to 3.4% year-over-year. Both numbers hit the expectations bull's eye.

Markets will welcome as-expected job growth, but what about the consumer? Will next week's CPI report show a drop in real wage growth? Analysts expect May's annual headline CPI to land at 4.2%.

"Despite the uptick in market activity, workers have yet to translate that momentum into meaningful bargaining power," writes Nicole Bachaud, economist at ZipRecruiter. She adds, "Average hourly wages grew just 3.4% in May, now running below inflation. With energy prices still elevated, that squeeze falls hardest on the low- and middle-income households, who spend a greater share of income on fuel and food."

The jobless rate USUNR=ECI held firm at 4.3%, while the labor market participation rate repeated April's 61.8% print, which was the lowest reading since October 2021.

Curmudgeon alert: low labor market participation and low unemployment rates go hand-in-hand. When folks leave the workforce, they are no longer counted among the unemployed.

Another blemish on the report can be found in the average unemployment duration, which ticked up to 26.8 weeks, or 4.2 weeks longer than a year ago. That jibes with deteriorating labor market confidence.

“Consumers are still facing significant financial pressure despite a relatively healthy employment backdrop," says Steve Rick, chief economist at TruStage. "Rising credit card balances, elevated delinquency rates and the lingering effects of inflation suggest many households are relying on employment stability to maintain spending."

Broken down by race and ethnicity, joblessness among White and Asian workers ticked higher, to 3.8% and 3.6%, respectively, still well below the national average. Unemployment among those who identify as Hispanic held firm at 5.0%. But the jobless rate among Black workers dropped 0.7 pps to 6.6%, the lowest level in a year.

Taken together, the White/Black jobless gap narrowed to 2.8 pps, also the lowest reading in a year.

(Stephen Culp)

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