The U.S. economy continues to surprise analysts with its latest curveball in the form of the May employment report. According to the Labor Department, employers added 272,000 jobs last month, surpassing economists’ expectations and indicating a faster pace of hiring than previously anticipated. This increase in job growth, up from the 232,000-job average over the past year, has disrupted the notion of a slowing economy transitioning to a more sustainable pace.
One of the most concerning aspects of the report for the Federal Reserve is the 4.1 percent increase in wages from a year ago. This rise in wages suggests that inflation may not be as under control as previously thought, leading to doubts about the possibility of a rate cut in July. While higher wages are beneficial for workers, they can also erode spending power if inflation continues to rise.
Following the release of the report, stocks initially fell but later recovered most of their losses by the end of the day. Government bond yields, which reflect expectations for Fed rate changes, rose sharply and remained elevated throughout the trading day. The mixed signals from the report have left economists uncertain about the true state of the labor market.
Despite the strong job growth numbers, the unemployment rate ticked up to 4 percent, the highest since January 2022. This increase is based on a household survey that showed no employment growth over the past year and a rise in part-time employment at the expense of full-time positions. This discrepancy between employer data and household surveys has added to the uncertainty surrounding the economy’s trajectory.
Other economic indicators, such as retail sales flattening, a decline in GDP growth, and a decrease in job openings, have led most economists to predict a further slowdown in employment growth and a rise in the unemployment rate in the coming months. The lack of strength in data outside of the healthcare sector has raised concerns about the overall health of the economy.
Healthcare has been a consistent source of job growth, driven by an aging population and increased access to care through the Affordable Care Act. In contrast, the leisure and hospitality sector, heavily impacted by Covid-19 lockdowns, has been slower to recover. While forecasts of a strong summer travel season may boost employment in this sector, it is unlikely to surpass previous levels.
Government employment, which was expected to decline as pandemic relief funding waned, surprisingly added 43,000 jobs in May. However, this trend may not continue as funding runs out, leading to potential job losses in the public sector. The impact of these changes is already being felt in sectors like education, where resources are dwindling, affecting the delivery of services.
The labor market’s resilience has been supported by an increase in legal immigration and temporary migrants finding work with accelerated work permits. However, as policies change, the impact of these factors may diminish. Despite challenges, there are positive signs, such as increased participation rates among certain age groups, indicating a healthier workforce.
As the economy navigates through uncertainties, the path of the labor market will have significant implications for the upcoming election. While growth may slow, the likelihood of a recession remains low, barring unforeseen events. Overall, the economy appears to be teetering on a delicate balance, with the hope of steady growth and decreasing inflation in the near future.
