Labor market divergence Labor market divergence\images\insights\article\jobs-report-good-small.jpg June 7 2024 June 7 2024

Labor market divergence

Nonfarm payroll strength belies weakness in other areas.

Published June 7 2024

Bottom Line 

Job growth soared by a much stronger-than-expected 272,000 jobs in May, while average hourly earnings surged by higher-than-expected levels of 0.4% month-over-month (m/m) and by 4.1% year-over-year (y/y). This toxic mix of a strong labor market and accelerating wage inflation is likely to keep the Federal Reserve firmly anchored to the sidelines through the summer. 

The May gain in nonfarm payrolls was well above consensus expectations at 180,000 and Federated Hermes’ forecast at 185,000, though previously reported March and April gains were revised down by a combined 15,000 jobs. The Labor Department revised April down by 10,000 jobs to a gain of 165,000 and March down by 5,000 to 310,000.

Private payrolls also rose by a stronger-than-expected 229,000 jobs in May (consensus at 165,000), though April and March were revised down by 20,000. The difference between nonfarm and private hiring was a gain of 43,000 government positions in May, with 34,000 of them coming from local hiring.

Data divergence May’s strong employment report, however, is inconsistent with across-the-board weakness in other pockets of this week’s data dump. Household employment in May lost jobs for the fourth time in the last six month. The unemployment rate (U-3) surprisingly rose to a more than 2-year high of 4.0%—triggering Sahm Rule recession concerns—and the participation rate declined sharply to 62.5%. Temporary hiring (an important leading employment indicator) lost jobs for the fourth consecutive month and for the fifteenth time in the last 16 months. Earlier this week, ADP posted a tepid gain of only 152,000 jobs in May, a 4-month low, while April’s JOLTS report was at a 3-year low, down 34% from its peak. 

Moreover, according to Piper Sandler, data from the most recent Quarterly Census of Wages and Employment suggests that 2023 payroll growth was likely overstated by 770,000 jobs, or an average of more than 64,000 each month. 

Higher for longer We are still expecting only one or two rate cuts this year after the election on November 5, with this morning’s combination of strong nonfarm payroll growth and soaring wages solidifying our out-of-consensus view. We continue to believe that a patient, data-dependent, wait-and-see approach for the Fed is appropriate as they consider their timing on interest-rate cuts. 

Important labor-market indicators mixed: 

  • ADP private payroll survey May added a weaker-than-expected 152,000 jobs (consensus at 175,000), a four-month low and19% below April’s downwardly revised gain of 188,000. Workers who changed jobs last month saw their wages rise 7.8% year-over-year (y/y), down from 8% in April and more than half from the peak of 16.4% in June 2022. But job stayers in May experienced their slowest wage growth in nearly three years, with a modest increase of 5.0% y/y, down from a peak of 7.8% in September 2022. 
  • Initial weekly jobless claims This high-frequency leading employment indicator rose 3.6% to 229,000 for the week ended June 1, 6% higher than May’s survey week of 216,000 claims for the week ended May 18. For the past nine months, we’ve noticed an unusual pattern in which claims fall by an average of 7% going into the survey week and then rebound by an identical average of 7% in subsequent weeks. This has the effect of goosing the flash report for nonfarm payrolls, which are eventually revised lower. 
  • Challenger, Gray & Christmas layoffs Employers announced the fewest layoffs in five months in May, as 63,816 were down 20% from a year ago and 1.5% lower than April. Entertainment/leisure layoff announcements of more than 9,000 workers (14% of total) dominated this category.
  • Job Openings & Labor Turnover Survey (JOLTS) April job openings dropped to their lowest level in more than three years, down by a larger-than-expected 3.5% m/m to 8.06 million (consensus at 8.35 million), compared with a downwardly revised 8.36 million in March. That’s nearly 34% below a record 12.182 million job openings in March 2022. The rate of job openings fell to a more than three-year low of 4.8% in April, down from a record 7.4% two years ago. The ratio of available job openings for every unemployed worker fell to a nearly 3-year low of 1.2 in April, down from a peak of 2.0 in March 2022. The number of voluntary quitters rose nearly 3% to 3.51 million in April, and the quits rate held steady for the fourth consecutive month at a 4-year low of 2.2%. This metric peaked at 3.0% in April 2022. 
  • Quarterly wage inflation At 4.0% quarter-over-quarter annualized, unit labor costs surged the most in a year in the first quarter, up sharply from a decline of -2.8% in the fourth quarter. Nonfarm productivity plummeted in the first quarter to an increase of only 0.2% quarter-over-quarter annualized, down significantly from gains of 3.5% and 4.6% in the fourth and third quarters, respectively. 

Wage inflation soars while hours worked flat Average hourly earnings rose by stronger-than-expected gains in May of 0.4% m/m (which annualizes to 4.8%) and 4.1% y/y. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked were unchanged at 34.3 in May for the third time in the past four months. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to cut hours before they downsize staff. 

Border crossings impact labor market More than eight million migrants have streamed across the southern U.S. border over the past three years, and many have taken jobs here, either officially or as part of the underground economy. As a result, the number of foreign-born workers (aged 16 years and over) has increased by 637,000 over the past year. Their worker participation rate is 66.2%, with an unemployment rate of 3.4%. But the number of native-born workers has decreased by 299,000 over the past year. Their much smaller participation rate is 61.6%, with a higher unemployment rate of 3.8%. We believe this mix shift has helped to keep a lid on wage inflation overall. 

Unemployment rate rises, labor impairment flat, participation rate declines Household employment (an important leading employment indicator) lost 408,000 jobs in May for the fourth time in the past six months. The number of unemployed people increased by 157,000 workers in May, up sharply from 63,000 workers in April and a decline of 29,000 in March. So, the official rate of unemployment (U-3) ticked up to a higher-than-expected 4.0% in May, versus 3.9% in April, 3.8% in March, 3.7% in January and April 2023’s 53-year low of 3.4%. 

That triggers renewed focus on the evolving Sahm Rule, which states that if the unemployment rate rises 0.5% or more on a rolling 3-month basis within a year, the economy typically slows into a recession. 

The labor impairment rate (U-6) was unchanged at 7.4% in May, up from 7.3% in March, 7.2% in January, 7.1% in December and 7.0% in November, all well above the cycle low (dating back to 1994) of 6.5% in December 2022. 

The civilian labor force declined by 250,000 workers in May for the first time in four months, after gaining 87,000 workers in April, 469,000 in March and 150,000 workers in February. The participation rate fell to 62.5% in May from 62.7% in April, matching a 3-month low. That’s down from a post-pandemic high 62.8% in November, while the pre-pandemic cycle high was 63.3% in February 2020. 

K-shaped recovery gap steady The rate of unemployment for highly educated workers ticked down to 2.1% in May, compared with September 2022’s cycle low of 1.8%. But the rate of unemployment for less-educated workers declined to 5.9% in May from 6.0% in April. The 31-year low of 4.4% was in November 2022.

Sector details mixed: 

  • Temporary help lost 14,000 jobs in May for the fourth consecutive month and the 15th time out of the past 16 months. 
  • Manufacturing added a better-than-expected 8,000 jobs in May, up from 6,000 in April after losses of 6,000 jobs in March and 9,000 in February. The ISM manufacturing index surprisingly declined to 48.7 in May. It has been below the 50-contraction level 18 of the past 19 months. 
  • Construction added 21,000 jobs in May, up from breakeven in April, compared with gains of 37,000 jobs in March, 24,000 in February and 26,000 in January. 
  • Retail added 13,000 jobs in May, down from 23,000 in April, 19,000 jobs in March, and 23,000 in February, as April retail sales were much softer than March, due to the early Easter. 
  • Leisure & hospitality added a healthy 42,000 jobs in May, up sharply from only 12,000 jobs in April, after adding 54,000 in March and 26,000 in February, after a loss of 3,000 jobs in January.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

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