May Payrolls: All Together Now

June 1, 2018

The May employment report was less notable for the size of any particular upside surprise than the consistency of its upside surprises and the good news throughout. The rise in employment across the establishment and household surveys was on roughly the same scale, wage growth ticked back up, and the 3-month average in payroll growth returned to about 180k – comfortably within its range since late 2016. Intriguingly, the progress on several areas of labor market slack suggested that the U.S. labor market is not at full employment after all.

The Highlights:

  • Nonfarm payrolls rose by 223k. Net upward revisions of 15,000 to the prior two months brought the 3-month average to 179k from a previously reported 208k.
  • The “U3” unemployment rate declined for the second month after a six-month hiatus, to 3.8%. On an unrounded basis, it dropped over 0.17% to 3.75%.
  • At 2.7% over 12 months, growth in average hourly earnings brought a welcome upside surprise.

The Rundown:

  • The establishment survey was replete with strength. Nearly every major sector expanded, and all of the largest ones did, causing the employment diffusion index to rise from a robust 64.0 to an even more robust 67.6. To find anything less than encouraging required real digging. Utilities declined a paltry 1.1k after teetering on either side of zero for a number of years. Temporary employment declined (-7.8k vs. 9.2k prior), restraining growth in professional/business services (31k vs. 43k). Manufacturing moderated but not meaningfully (18k vs. 25k). Other than that, it was a pretty much straight diet of good news. In signs of a possible weather effect, retail trade had a particularly strong month (31.1k vs. 8.8k), as the late-breaking spring thaw seems to have contributed to outsized moves in apparel, building materials / garden supply, and department stores.
  • The household survey was if anything even more encouraging. The “U6” underemployment rate declined to 7.6% from 7.8% as involuntary part-time work declined from 4.99 million to 4.95 million, and bringing it at long last in line with its average distance from the unemployment rate over the pre-crisis 1994-2007 period. Looking at the the ranks of the unemployed by reason for unemployment, job leavers was the only group to rise, which indicates not only strong worker confidence, but also bodes well for wage growth, since job-hopping is an important way to get a raise. Other notable details: Unemployment rates declined most sharply for Black / African American and Asian groups (although it rose for Hispanic/Latino) and declined more sharply for lower-education groups (high school grads -0.4%, college grads -0.1%). The largest decline by duration of unemployment occurred among the long-term unemployed. Taken together, these improvements — plus recent conversations about the still-depressed prime-age employment/population ratio — suggest there has been some lingering slack in the labor market after all, and that we have not actually reached full employment just yet.
  • The uptick in earnings was particularly notable given that calendar effects were expected to depress this number in May. This, along with the rise in aggregate weekly hours, will support an acceleration in overall economic growth in Q2.

The Outlook:

  • The consistency of this employment report should lay to rest any questions about the efficacy of fiscal stimulus. That said, the 3-month average in payroll growth has yet to break out of recent ranges. This leaves open the question of what the net effect will be of fiscal stimulus versus the cyclical and demographic factors that many economists believe should bring headline payroll growth down to a level closer to 100k per month.
  • With a June rate hike all but certain, the debates around interest rates now focus on the second half of the year, but with the luxury of a little breathing space, Fed policy makers are focusing on longer-term issues, such as communication with financial markets via forward guidance, the symmetry of its inflation target, and what level of interest rates should be considered neutral. With jobs numbers as strong as this, the urgency of these questions will rise, but it seems most policy makers believe they have several more hikes to go before they need to settle the latter two of these debates.
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