Construction workers at a construction site on May 5, 2023 in Miami, Florida.
Joe Raedle | Getty Images
Viewing monthly jobs reports has been something of a hold-up pattern this year as economists and market participants waited for a downturn that seemed unlikely to materialize.
That scenario is likely to repeat itself on Friday when the Labor Department releases its nonfarm payrolls figures for May. Economists polled by Dow Jones are expecting job growth of 190,000, a slowdown from the 253,000 jobs added in April, below the 2023 monthly average of 284,500 and the lowest monthly gain since December 2020.
However, judging by how these reports have unfolded, the risk is likely to the upside as the labor market has shown great resilience. The number of jobs has beaten consensus estimates 13 out of 16 times since January 2022.
“It still looks tight on the job market. There are many vacancies and unemployment is at its lowest level in 50 years. We expect continued job gains…actually a bit above consensus,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “I would tell people to focus on the trend.”
Although the headlines contradicted the market outlook, LaVorgna sees some underlying weakness.
Total job vacancies edged up to 10.1 million in April, but the key leisure and hospitality industry actually saw a nearly 6% drop, according to Labor Department data released on Wednesday. That could be bad news for a sector that added more than 900,000 jobs last year.
Also, the April non-farm payrolls report showed that estimates of job growth for the previous two months were cut by 149k, suggesting the picture from earlier in the year was not quite as robust as initially thought.
“Right now, we’re nearing a tipping point,” said LaVorgna, who was chief economist at the National Economic Council under former President Donald Trump. “I don’t think it will happen in May, but given the scale of the Fed’s economic tightening and tighter lending standards, the job market should weaken. History shows us when it happens, it happens quickly.”
Defy the Fed
The Federal Reserve has been struggling with a tight labor market and pressures on wages and inflation. The central bank has hiked interest rates 10 times since March 22, but inflation has remained well above the Fed’s 2 percent target.
However, policymakers have signaled that they may be ready to forgo further rate hikes at their meeting later in June as they wait to see how tightening policies have affected conditions.
“A decision to hold our interest rates steady at an upcoming meeting should not be interpreted as meaning that we have reached the maximum interest rate for this cycle,” said Fed Governor Philip Jefferson in a speech on Wednesday. “In fact, that would make it possible to forego a rate hike at an upcoming meeting [rate-setting Federal Open Market Committee] to see more data before making decisions on the extent of further policy tightening.”
One area that policymakers will focus on is the average hourly wage.
Wages are expected to rise 0.3% this month and 4.4% yoy, a level inconsistent with a return to 2% inflation, officials said. However, May could bring some good news in this regard.
A “fully occupied” labor market?
Data from Homebase shows that wages for small and medium-sized businesses fell 0.2% in May, the first monthly decline since 2021. This came even as the number of employees rose 0.64% and hours worked increased by 1.16%.
Payroll company ADP reported on Wednesday that wages for workers who stayed on the job rose 6.5% in May, still high but slowing from previous months. ADP also announced that the number of private employees rose by 278,000 in May, more than expected.
A Fed report on Wednesday found that wages had risen “modestly”, consistent with the Beige Book’s other observations on the labor economy.
“Overall, the labor market remained strong, with contacts reporting difficulties in finding workers across a wide range of skill levels and sectors,” the report says. Some employers said “they were fully staffed, and some reported they were pausing hiring or reducing headcount due to weaker actual or projected demand or greater uncertainty about the economic outlook.”
The unemployment rate was expected to rise to 3.5% in May, still close to its lowest level since 1969.