Surprising strength in May jobs report offers Fed a mixed outlook

Health care, other service sectors lead job additions

Nonfarm employers nationwide added 272,000 new jobs to their payrolls in May, a stronger-than-expected increase and a sharp reversal from the underwhelming gain of the prior month.

May’s jobs increase reported by the U.S. Bureau of Labor Statistics (BLS) shattered the forecast of 185,000 additions predicated by a Reuters poll of economists. It also eclipsed the average of 232,000 new jobs added per month for the past year. Service industry sectors continued to flex employment muscle, with leisure and hospitality (which added 42,000 jobs), health care (84,000) and government (43,000) comprising roughly 60% of May’s uptick. But other sectors showed strength, too; 63.4% of industries tracked by the BLS added jobs in May, the largest share since the beginning of 2023.

Wage growth also rebounded from a weak April. Average hourly earnings rose 0.4% in May, bringing the annualized average gain over the past three months to 4.1%, consistent with the actual gain of 4.1% over the past year. That’s a strong reading; consider that from 2018 to 2019, average hourly earnings averaged a 3.2% growth rate.

Such figures underscore figures underscored the resilience of the job market, even as it cools. Evidence of that cooling was present in the shift in the unemployment rate, which rose to 4%, the first time it has reached that threshold since January 2022. The unemployment rate is calculated through a survey of households, as opposed to job additions which are determined via a survey of establishments, hence the discrepancy. The labor force participation rate, computed through the household survey as well, also retreated, ebbing to 62.5% after the labor force declined by 250,000.

Inevitably, observers within the mortgage sphere will look to parse whether this report influences the Federal Reserve’s stance on interest rates. Odeta Kushi, chief economist for First American Financial Corp., said that it doesn’t appear probable.

“From the Fed’s perspective, this is a mixed report. Strong job and wage growth could keep inflation concerns high. However, the uptick in the unemployment rate may offset those worries. Additionally, other labor market reports, such as the JOLTS (Job Openings and Labor Turnover Survey) report, indicate a still strong, but gradually easing labor market. Notably, the ratio between the number of job openings and unemployed people decreased to 1.24, just above pre-pandemic levels,” Kushi said.

“Ultimately, today’s jobs report alone is unlikely to shift the Fed’s stance. The Fed will likely remain in a holding pattern, waiting for more data.”


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