The early survey week kept headline job gains lower than trend – watch for a June rebound. Meanwhile job and wage numbers for May still support the case for continued economic growth and stronger income.
Jobs Up 138,000 in May: More Consistent with Fundamentals
Nonfarm payrolls rose a modest 138,000, with the three month average at 121,000 jobs. This morning’s print is consistent with the demographics of the labor force and the anecdotal comments of a skills shortage. Hiring in the services sector remained above its three month moving average, as gains in business services, education & health and leisure & hospitality were solid. Retail continues to exhibit weakness due to ongoing structural challenges. Financial services continue to exhibit modest gains.
In the goods sector, manufacturing employment posted a decline out of line with other indicators, although April’s reading was revised up. Hiring in construction, however, was up 11,000 jobs, likely reflecting some seasonal improvement. State and local employment declined – particularly noneducational related. Our outlook remains for a rebound in real GDP growth in Q2 and gains of roughly 2.5-3.0 percent for the second half of this year.
Wages: Not an Isolated Number but Part of the Economic System
Average hourly earnings rose 0.2 percent in May, keeping the year-ago pace of wage growth at 2.5 percent. Despite continued steady job growth in 2017, earnings have yet to break out of this mid-two percent pace. The softer inflation readings over the past couple months have likely weighed on nominal wage growth. On balance, average hourly and weekly earnings continue to improve and, along with more jobs, support the case for household income gains.
Over the longer run, wages reflect the economic fundamentals of the labor market, and those fundamentals include productivity and inflation (middle chart). During the current cycle, analysts have repeatedly commented on low productivity, while inflation has been persistently below the FOMC’s target of two percent. With both productivity growth and inflation continuing to prove sluggish, it is not altogether surprising that wage growth has disappointed given the performance of the fundamentals.
Underneath the Cycle-Low Unemployment Rate
The headline unemployment rates were 4.3 percent (U-3) and 8.4 percent (U-6) in May, once again new cycle lows. Yet, underneath the headline, the labor market continues to face a cross-current of challenges.
First, the labor force participation rate has stabilized in recent months, but is below the rates seen for both men and women over the prior two decades. Second, despite steady improvement, those employed parttime for economic reasons remains higher than has been the case in previous expansions. Finally, the long-term unemployed as a percent of total unemployment remains elevated relative to the prior three expansions. These are structural issues that require focused, targeted microeconomic policies, not more macroeconomic policy actions.
