Highlights:
- May payroll employment rose 223K which was up from the 159k increase in April (164k previously) and market expectations going into the report of 190k increase.
- Unexpected strength in labour markets was also conveyed by the unemployment rate dropping to 3.8% from 3.9% in April. Expectations had been for this rate to hold steady in May after dropping a marked 0.2 percentage points in April from 4.1% in March.
- The annual increase in wages rose to 2.7% from the 2.6% in April. This rate was anticipated to hold steady at the April level.
Our Take:
Today’s May employment report showed the unemployment rate unexpectedly dropping even further to 3.8% after a marked 0.2 percentage point drop in April to 3.9% and matches the lowest unemployment rate since 1969. As well, it moves this rate even further beyond the Fed’s estimate of a long-run equilibrium rate of 4.3% to 4.7%. Indications of labour markets operating beyond capacity were reinforced by the annual increase in wages rising to 2.7% from 2.6% in April and a 2017 average increase of 2.5%. This data provides support to this week’s beige book report that indicated inflation pressures building in the system though indicated that the pressure from wages was more modest relative to that emerging from material costs. The increase in payroll employment was surprisingly strong rising 223k up from the 159K increase in April. Our expectation is that with labour markets operating beyond capacity average employment gains going forward are likely to moderate back down to the April level reflecting a tightening supply of workers. The week’s beige book report highlighted anecdotal reports of firms having increasing difficulty “filling positions across skill levels.”
