US: Employment exceeds forecasts, unemployment rate remains at 3.6%

After a revised 436K gain in April, nonfarm payrolls increased by 390K last month. The unemployment rate remained at 3.6% and the labor force participation rate increased from 62.2% to 62.3%. The median forecast of economists was a 318K increase in employment and a decrease in the unemployment rate to 3.5%. Broadly speaking, the unemployment rate rose from 7% to 7.1%. In the private sector, there are 301K job gains. However, non-farm employment posted the lowest increase since April 2021. Surprising employment data shows that companies continue to be confident about demand and the future of the economy.

If we look at the sub-items; Significant business gains have occurred in leisure and hospitality, professional and commercial services, transportation and warehousing. Retail trade employment declined during the month. Employment in the entertainment and hospitality sector increased by 84K in May, with continued job growth in catering and drinking venues (+46K) and accommodation (+21K). Employment in construction increased by 36K in May after no change in April. In May, employment increased by 36K in public education and 33K in private education. Healthcare employment increased by 28K in May, including an increase in hospitals (+16K). Manufacturing employment continued to rise in May (+18K), although there is a very clear slowdown. Retail employment decreased by 61K in May, but is still 159K above February 2020 levels. A return to normal effect is observed in service and retail-based sectors, depending on post-Covid dynamics.

Average hourly earnings for all workers in nonfarm pay employment rose 0.3% in May. Average hourly earnings increased 5.2% year over year over the past 12 months. The annual decline in wage inflation from 5.5% to 5.2% is a positive detail in that demand-based inflation does not create a spiraling effect on wages. In May, the average working hours for all workers in the non-agricultural sectors was 34.6 hours for the third month in a row. In manufacturing, the average work for all workers changed little at 40.4 hours, and overtime decreased by 0.1 hour to 3.2 hours.

The loss of momentum in the labor market should be read as the effect of job changes and adaptation to normalization in the post-Covid period, rather than a deterioration. However, companies review their financing positions and, accordingly, their budgets. Many web and technology-based companies are considering similar employment plans, similar to Elon Musk’s statement that Tesla needs to cut its headcount by 10%. Therefore, we will see a slowdown in labor force growth in the near future. This will be both about approaching natural limits and about the Fed’s policies.

In terms of the Fed; CPI data will continue to be the main determinant. If we had seen very high wage pressure, we would have seen more analysis on whether the Fed should raise rates by 75 bps, but the market would not shift there with these data. There would also be no shift from 50 bps to 25 bps if the data was weak. Brainard’s statements yesterday are important in that it shows that the Fed is not thinking of waiting in September, it means that there may be an interest rate increase of 3 50 bps instead of 2 depending on the situation. It seems that the Fed will not be bothered by the increase in the unemployment rate while increasing the interest rates.

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