In recent weeks, we’ve watched evidence accumulate suggesting that the economic narrative is shifting toward one in which growth cools from very hot levels — but not by so much that the economy spirals into a recession.
The May U.S. jobs report released Friday provided more confirmation of this shift.
According to the report, U.S. employers added a healthy 390,000 jobs in May. This was down from the 436,000 jobs added in May but still stronger than the 318,000 gain that economists expected.¹
The unemployment rate was unchanged at a very low 3.6%², though it’s worth noting that the labor force participation improved to 62.3% as 330,000 people entered the labor force.
Average hourly earnings in May, meanwhile, increased by 0.3% from April, reflecting a 5.2% gain from a year ago. However, this is down slightly from the 5.5% annual growth rate in April and the 5.6% rate in May.
In summary, the U.S continues to put people back to work, which is good news for economic growth. The pace of job growth may be cooling, but employers seem to be attracting people back into the labor force without causing wage growth to accelerate, which is good news for those looking to bring inflation down.
This is exactly the kind of balance the Federal Reserve is hoping for as it continues to tighten monetary policy in its efforts to cool inflation from very high levels.
Here’s some of what Wall Street’s top economists said following Friday’s report:
“It appears that we are past the peak in wage inflation.“ – Stephen Juneau, U.S. economist at Bank of America“Simply put, there’s a good chance that wage growth is past its cyclical peak and a cooling trend is underway.“ – Bob Schwartz, senior economist at Oxford Economics“Today’s report lands in a sweet spot for the Fed.“ – Sarah House, senior economist at Wells Fargo“For the Fed, today’s report is probably about the best they could hope for in the early innings of the tightening cycle.“ – Michael Feroli, chief U.S. economist at JPMorgan“The deceleration in wage growth is encouraging because it suggests that the broader cyclical price pressures in the economy are close to peaking. But it will take a slowdown in annual wage growth to closer to 4% before the Fed can claim it is making significant progress towards its inflation goal.“ – Michael Pearce, senior U.S. economist at Capital Economics“In short, the May report supports the view that while the labor market remains firm, it continues to gradually slow.“ – Oscar Munoz, macro strategist at TD Securities“Admittedly we do expect to see slower payrolls growth in coming month, but this should not come as a huge surprise given that 21.2mn of the 22mn jobs lost in March and April 2020 have now been filled.“ – James Knightley, chief international economist at ING“This is a watershed moment for the trajectory of payrolls and now directly places the spotlight on how deep this turn will be.” – Rick Rieder, CIO of global fixed income at BlackRock
It may seem odd to be celebrating a slowdown in wage growth. But high wage growth amid tight supply is part of the reason we have high inflation. And wage growth isn’t worth much if inflation is eating away at your spending power. This is why good news is bad news these days.
More signs that the labor market is inflecting
For almost two years, we’ve been hearing about intensifying labor shortages across industries as millions of jobs — and counting — have gone unfilled, a challenge that has caused wages to surge, which in turn has been pushing inflation higher for goods and services.
But in recent weeks, we’ve been getting signs that the labor market could be at an inflection point.
Here are some of the datapoints:
- Job openings ticked lower to 11.4 million in April from a record-high 11.9 million in March.
- There were 1.92 job openings per unemployed person in April, down marginally from a record high of 1.99 in March.
- Labor market sentiment — as measured by the labor market differential — recently fell to its lowest level since May 2021.
- Private payrolls in May grew at its slowest pace since April 2020, according to payroll processing firm ADP.
- Initial claims for unemployment insurance came in at 200,000 for the week ending May 28, which is still below pre-pandemic levels but up from its six-decade low of 166,000 in March.
- The ISM manufacturing survey’s employment index fell to 49.6 in May, signaling contraction in factory jobs. It was the lowest print since November 2020.
None of this screams recession, especially with layoffs at record lows. But taken together, it appears that the labor market is a little less hot than it was earlier this year and people are picking up on it.
And the fact that this cooling has so far come without a material spike in the unemployment rate will be welcome news for the Fed as it maneuvers to bring down inflation.
That said, inflation data will be watched extremely closely in the coming months. Because keep in mind: The Fed’s ultimate goal isn’t to just slow the economy. Its ultimate goal is to cool inflation. Using policy tools to slow the economy is just a means to achieve those ends.
