May Jobs Report – Probably Keeps Fed on Hold Through Summer

• May nonfarm payrolls rose 139 thousand, narrowly beating the 126 thousand expected but slightly off the 147 thousand in April (revised down from an initial 177 thousand).  Speaking of revisions, March was also revised down by a sizeable 65 thousand jobs bringing two-month revisions lower by 95 thousand. As we seem to say every month, monthly revisions have generally been to the downside for more than a year now, and that was certainly the case again in May. The average monthly gain over the last 12 months was 149 thousand, so May was slightly below the annual average, but clearly not falling off a cliff. Private sector job growth was solid at 145 thousand which was well clear of the 120 thousand expected and practically equal to the downwardly revised 146 thousand in April. ADP’s 37 thousand private sector reported on Wednesday points again to the lack of insight provided from that series.

 

• Job gains were strongest in healthcare/social assistance, a perennially strong category, (78k). Other categories showing decent gains were leisure/hospitality (48k) and financial services (13k). Job losses were concentrated in temporary help (-20k), manufacturing (-8k), and retail trade (-6.5k) (see graph below).   Once again, it’s easy to see the strength in the service sector hiring vs. the goods side of the economy and that is what we’ve been seeing across a host of reports with services carrying the economy and that continues to be the case.

 

• The Household Survey, which is smaller in size than the Establishment Survey and then extrapolated across population totals, generates the unemployment rate, labor force participation rate, etc.. The survey reported a drop of 696 thousand jobs and an increase of 71 thousand increase in unemployed persons. Total unemployed increased from 6.635 million a year ago to 7.237 million in May, an increase of 1.02 million. The survey also reported a decrease of 625 thousand in the labor force. The slight increase in unemployed was offset by the decrease in the labor force such that the unemployment rate stayed unchanged at 4.2% (4.244% unrounded vs. 4.187% in May) matching the expectation and April’s result, although the unrounded result is inching closer to a 4.3% result and above the 2024 high of 4.231%. Such is the nature of the labor market this year where we’re studying the unemployment rate to three decimal points for directional information!

 

• With the decrease in the labor force, the Labor Force Participation Rate decreased two-tenths to 62.4%, missing the 62.6% expectation and April result. The dip in May brings the rate to the lowest level since December 2022. The participation rate has been range bound for quite some time, for instance, it was 62.6% a year ago. In any event, the downtick in the participation rate is never welcome news at the Fed (see graph below).

 

• The Underemployment Rate (unemployed plus part-time but wanting full-time, and those wanting work and having looked at some point in the last year remained at 7.8% for a second month.  That level peaked at 23% back in May 2020. It bottomed at 6.6% a couple times back in 2022, just as the Fed was beginning its rate-hiking cycle. It was 7.1% one year ago.  It wouldn’t surprise us to see this rate continue to climb in the months ahead given the slower growth posture of the economy, but for May that didn’t happen.

 

• Average Hourly Earnings rose 0.4% (0.4152% unrounded) MoM, beating the 0.3% expectation and the April gain of 0.2% (0.194% unrounded).   For the third straight month the year-over-year pace remained at 3.9%, (3.869% unrounded) beating the 3.7% expectation. Average weekly hours remained at 34.3 hours for a third month and matching expectations. The continued solid wage gains will be another reason for the Fed to remain in pause position.

 

• The May’s jobs report was a touch stronger than expected, but again the disparity between the two surveys, Establishment and Household, painted differing pictures. Given the smaller sample size in the Household Survey it is considered the less reliable of the two releases, so it gets reduced emphasis by investors when the results conflict. However, the weekly jobless claims series most recently increased to the highest since a spike in October. Meanwhile, the Challenger Job Cuts release found 47% more job cut announcements in May (93,816) than in May 2024 (63,120), but it was modestly less than April’s outsized 105,441. Suffice it to say, job cut announcements seem to be heading gradually higher and that fits with much of the labor market data: trending softer but in a slow, subtle way. Obviously, the risk is that this slow-moving softening accelerates but that is not the story in May. 

 

• With the shadow of tariff uncertainty continuing to hang over markets, the fear is the consumer could hunker down, tipping the economy into recession. But as long as job growth continues, albeit with less momentum, and wage gains remain within recent trends, the worst-case scenario that the consumer shuts down should be avoided. If one was looking for a clear sign of weakness from tariff uncertainties, this was not that report. The primary risk remains that the labor market eventually weakens as uncertainty over trade policies remains the primary business story. In summary, this report won’t move the Fed off their rate-cutting pause, but plenty of time remains for a possible September rate cut.   

 

• Shifting gears, in the week ending May 31, initial jobless claims totaled 247 thousand, an increase of 8 thousand from the previous week’s revised level of 239 thousand. The continuing claims figure for the week ending May 24 was 1.904 million, an increase of 3 thousand from the previous week’s revised level of 1.901 million. The initial claims figure is the highest since October 2024 when it briefly spiked and the continuing claims figure seems to be trending ever-so-slowly higher, indicating displaced workers are finding new jobs more difficult to obtain, which matches with recent consumer surveys that point to increasing difficulty in finding employment. 

 

• The ISM’s Services Index for May dipped to 49.9 from 51.6 a month earlier and is the lowest reading in a year. Expectations were for a bump to 52.0, so worse than expected, and into contraction territory, albeit by the slimmest of margins. The sub-indices were not much better. The index of employment ticked up to 50.7 from 49.0, but the Prices Paid Index registered 68.7%, a 3.6-percentage point increase from April’s 65.1% reading, and the highest since November 2022.  Meanwhile, the New Orders Index recorded a reading of 46.4% in May,  6 percentage points lower than the April figure of 52.3%, and the first decline in a year.

 

• It should be noted, the S&P Global Services PMI series reported a much better 53.7 reading vs. 52.3 in April, so the jury is out on what to make of the softer ISM read. The ISM series gets some deference from the market given its longer history but for now the ISM weakening is not confirmed by the S&P series and that will force everyone to look ahead to the June data for more clarity. Obviously, if the service sector unequivocally slips into contraction that bodes ill for the economy given how that sector has carried the economy for the last couple years.
  

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      Job Growth Refuses to Roll Over

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Health Care and Leisure & Hospitality Led Job Growth in May

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Labor Force Participation Rate Falls Two-Tenths – Are Deportations Starting to Show?Source: Bloomberg

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Initial Jobless Claims Rises to 7-Month High

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ISMs Both Decline in May, with the Services Sector Dipping Under 50