Blockbuster Jobs Report Sends Mixed Message to the Fed

Job growth accelerated in May as employers hired 272,000 workers, the Labor Department reported Friday. The results handily beat expectations for growth of 185,000 jobs, reflecting a labor market that is still showing signs of surprising strength and durability in the aftermath of the pandemic.

Job gains were broad-based and led by the service sector, with the education, health, government, and leisure and hospitality sectors accounting for about 60% of the growth.

Wage growth was robust, as well, as average hourly earnings rose 0.4% on a monthly basis and 4.1% on an annual basis. Both numbers topped forecasts.

At the same time, the unemployment rate ticked higher by one-tenth of a percentage point, rising to 4.0% after spending 27 months below that level. Forecasters had expected the rate to remain at 3.9%, and the surprise increase served as a reminder that for all its strengths, the labor market has cooled off since the highs seen in 2022 — though whether that cooling trend remains in place remains an open question.

A drop in the labor force participation rate from 62.7% in April to 62.5% in May was notable, but it was driven by a decline in the number of workers between the ages of 20 and 24. Meanwhile, the participation rate for prime-age workers (ages 25 to 54) rose to the highest level in more than two decades.

What analysts are saying: "The May jobs report is a Rorschach blot," wrote Bill Adams, chief economist for Comerica Bank, per Barron’s. "Optimists about the growth outlook will see solid payrolls growth as a sign the expansion continues unabated. Pessimists will focus on the unemployment rate’s uptick to the highest since early 2022, the increase in part-time employment, and the dip in temporary employment, which is often a leading indicator of broader job market weakness."

Some economists downplayed the significance of the data. "For everyone getting excited about the reported increase in the unemployment rate, it was nowhere near statistically significant," Ian Shepherdson, chief U.S. economist at Pantheon Macroeconomics, wrote on social media. "Neither were the changes in household employment, unemployment and the labor force. All just noise."

Even so, most analysts agreed that overall, whether it’s surging or just puttering along, the labor market is in a good place. "From our vantage point, this is the strongest labor market since the 1950s," said Joseph Brusuelas, chief economist at RSM.

The White House was glad to agree. "The great American comeback continues," President Biden said in a statement. "On my watch, 15.6 million more Americans have the dignity and respect that comes with a job. Unemployment has been at or below 4% for 30 months—the longest stretch in 50 years. And a record high share of working-age women have jobs."

Fed in the wings: The May jobs report provides one of the last significant pieces of data Federal Reserve policymakers will see before their meeting next week, and most analysts agreed that the latest numbers all but eliminate the possibility of an interest rate cut this summer as Fed policymakers remain focused on reducing inflation to their 2% target level.

"One step forward, two steps back," said Seema Shah of Principal Asset Management, per CNBC. "Today’s data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut."

Analysts also suggested that a September rate cut was doubtful. "This report is going to complicate the Fed’s job," Julia Pollak, chief economist for ZipRecruiter, told the Associated Press. "No one’s getting those very clear signals that they were hoping for that a rate cut is appropriate in July or September."

The bottom line: With strong job creation and rising wages, the May jobs report delivered good news for American workers and the broader economy – but also another reason for Fed officials to hold steady on high interest rates as they await clearer signs that inflation is continuing on a downward path.