U.S. non-farm payrolls accelerated in May, up a solid 223k, above consensus expectations for a 190k gain. That came after 159k new jobs in April. The past two months were also revised upwards by 15k jobs in total.
Services sector hiring (+171k) was the driving force behind the acceleration, although goods sector hiring also held up relatively well (+47k). Gains across industries were widespread. Retail trade (+31k), health care (+29k), construction (+25k), professional and technical services (+23k), transportation and warehousing (+19k), and manufacturing (+18k) all posted notable gains in May.
Perhaps even more surprising was the unemployment rate falling another tick to 3.8% – the lowest reading in 18 years. The labor force rose by a modest 12k people, and the participation rate fell a tick to 62.7%. That continues the essentially flat trend that has persisted over the past several quarters as retiring babyboomers lean against an increased share of core age (25-54 yrs) people working. Focusing on core age workers, the employment-to-population ratio held steady at 79.2%, but is 0.8 percentage points higher than a year ago. It also remains about one percentage point below its pre-recession peak, suggesting there is still some labor market slack.
Rounding out the good news, wage growth accelerated in May, rising 0.3% on the month. On a year-on-year basis, growth in average hourly earnings picked up to 2.7%.
Key Implications
This was an unambiguously strong report. May’s healthy hiring tally in part represents a catch up from some weather-related weakness in recent months. Looking at the six-month trend, hiring has averaged 202k new jobs per month, similar to its 12-month average pace. We do expect monthly payroll tallies to slow in line with a maturing expansion, as the economy runs out of people to pull back into the labor force.
With wage pressures picking up and the unemployment rate falling again, May’s employment report confirms that the Fed’s bias to raise rates on June 13th. This type of payrolls report would normally lend fodder to the four hikes in 2018 camp if it were not for the trade war cloud that risks raining on the U.S. economy’s parade.
