Economic Update: The Labor Market

The labor market continued to normalize in May, according to the latest monthly job report from the U.S. Department of Labor. Specifically, 390K payrolls were added to the economy in May, down slightly from April’s gain but above the consensus forecast.

There was a net downward revision of 22K payrolls to the prior two months’ figures, which resulted in a 3-month average pace of job creation of 408K. Altogether payrolls growth has clearly moderated recently but the monthly gains are still well above the pre-pandemic norm and on track to enable total employment to finally return to the pre-COVID peak sometime this fall. The latter, though, is only a minor accomplishment because there is still a significant jobs deficit left to recoup, i.e. where total employment would be if COVID never happened and the pre-pandemic pace of job growth had continued. One could also argue that the continued moderation in hiring is a good thing given the Federal Reserve’s concerns about the labor market overheating, and more clarity on this will be provided when officials release their updated economic projections at this month’s FOMC meeting.

As for joblessness, the official unemployment rate (U-3) held at 3.6 percent for the third consecutive month, just fractionally above the 50-year low of 3.5 percent. This apparent stall in joblessness declines so far is not alarming because it appears more a result of a combination of more people working and more people looking for work, i.e. an increase in labor force participation. Indeed, the labor force has been growing rapidly since late last year, an encouraging sign given concerns about a labor shortage, and prime-age (25-54) labor force participation has been a clear bright spot as it is now just within 0.4 percentage points of its pre-pandemic level. Moreover, roughly 80 percent of prime-age Americans were working or looking for work in May, a significant rebound from the sub-70 percent reading seen in April 2020.

Despite the gains in participation it has yet to be enough to meaningfully address the labor supply challenges many employers are facing. Further, the rate at which unemployed Americans are finding work rose in May, and there has yet to be any sign in the data of a sustained pickup in the pace of workers losing jobs. Add to this the surge in the quits rate seen in the latest JOLTS figures and it is clear wage bargaining power remains firmly on the side of labor. However, even with workers’ apparent advantage the pace of wage growth has cooled compared to earlier in the recovery. For example, looking at the 3-month change in average hourly earnings for American workers it is clear that wage growth has slowed since fall 2021. However, it is not obvious that it is slowing further right now.

This “slower but not necessarily slowing” dynamic is especially prevalent in the leisure and hospitality sector, where the pace of wage gains has clearly come down from the extremely rapid pace seen last year but growth has actually picked back up again during the past few months. Also of note, while we wait for the effects of tightening monetary policy to kick in, consumer price inflation is likely to continue outstripping wage growth in the short-term. However, even though average hourly earnings are not keeping up with inflation, “aggregate” earnings, which factor in growth in both hourly wages and hours worked, are outpacing inflation. This helps partially explain how consumer spending can remain so strong despite broad price increases for goods and services for American households.

What To Watch This Week

Monday

  • Investor Movement Index 12:30 PM ET

Tuesday

  • International Trade in Goods and Services 8:30 AM ET
  • 3-Yr Note Auction 1:00 PM ET
  • Consumer Credit 3:00 PM ET

Wednesday

  • MBA Mortgage Applications 7:00 AM ET
  • EIA Petroleum Status Report 10:30 AM ET
  • 10-Yr Note Auction 1:00 PM ET

Thursday

  • Jobless Claims 8:30 AM ET
  • EIA Natural Gas Report 10:30 AM ET
  • 30-Yr Bond Auction 1:00 PM ET
  • Fed Balance Sheet 4:30 PM ET

Friday

  • CPI 8:30 AM ET
  • Consumer Sentiment 10:00 AM ET
  • Quarterly Services Survey 10:00 AM ET
  • Baker Hughes Rig Count 1:00 PM ET
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