Bimb Research Highlights

Economics - US labor markets heats up in May

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Publish date: Mon, 04 Jun 2018, 04:16 PM
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Bimb Research Highlights
  • US adds just 223,000 jobs in May
  • Unemployment rate falls to 18-year low
  • Wages rose 0.3% mom, 2.7% yoy
  • The Fed is clear for another hike this month

US non-farm payrolls accelerated in May, up a solid 223,000, above consensus expectations for a 190k gain. That came after a downwardly revised 159,000 new jobs in April. The past two months were also revised upwards by 15,000 jobs in total. Over the past six months, job gains have averaged 202,000 per month and continue to indicate no cooling in the trend.

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. Other indicators of labor market slack also point to an increasingly tight labor market. U-6 unemployment, which includes workers marginally attached to the labor force and part-time workers who want full time hours, fell to 7.6% in May, marking the lowest level since 2001.The labor force rose by a modest 12k people, and the participation rate fell a tick to 62.7%.

Rounding out the good news, wage growth accelerated in May, rising 0.3% on the month, helped by a 1.4% jump in the financial services industry. On a year-on-year basis, growth in average hourly earnings picked up to 2.7%.

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 the latest 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 Fed is clear for another hike this month

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 US economy’s parade.

Source: BIMB Securities Research - 4 Jun 2018

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