A Mixed Bag Jobs Report

May's Report: The Good, The Bad and The Ugly

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The Good

U.S. payroll employment increased by a strong 272,000 in May, well above the consensus forecast of 185,000 new jobs. Which is to say, the economy keeps adding jobs at a healthy pace.

The Bad

That strong job growth came with faster-than-ideal wage growth; average hourly earnings increased at a 4.9% annual rate in May, the fastest pace since January. The Fed won’t like this.

The Ugly

The unemployment rate inched up to 4.0%. While that’s still really low by historical standards, it also ends a 27 month streak of sub-4.0% unemployment. More importantly, the unemployment rate rose for all the wrong reasons. The number of unemployed people increased, the number of employed people decreased (according to the household survey, more on that below), the labor force shrank, and the labor force participation rate fell.

The (or an) explanation

The data in the jobs report come from two sources.

The establishment survey asks roughly 650,000 businesses how their payroll levels changed. This gives us payroll employment data, which was very strong in May.

The household survey asks roughly 60,000 people about their employment status. This gives us unemployment and labor force data, which was very weak in May.

So which do we trust? Economists tend to put more weight on the establishment survey. Asking people about their employment status and whether they’re looking for work is more open ended than asking businesses how many workers are on their payrolls.

One school of thought takes 80% establishment survey and 20% household. By those weights, the economy would have added 136,000 jobs in May (+272k jobs in establishment, -408k jobs in household).

Job growth by sector

Private education and health services continues to dominate job growth, and it’s really just healthcare, because private education added just 2,000 jobs for the month.

Government also added a lot of jobs for the month, and most of them were noneducational local government positions. Restaurants drove growth in the leisure and hospitality segment, while consultants, architects, and engineers drove growth in the professional and business services segment.

Mining and logging, a very small segment, lost jobs for the month, while information employment (think tech and media) was flat.

You can read what Anirban had to say about the construction sector over at ABC.

What do we take from this?

The Fed will care most about the strong job growth and fast wage gains, meaning that you can wave goodbye to any hope of a July rate cut.

Bears will see today’s report as the worst of both worlds—signs of inflationary pressures from the establishment survey, and signs of a weakening economy in the household survey (both of those can’t be true, but the bears won’t care).

Bulls will focus on the establishment survey, which continues to show strong economic growth.

My thought? Take a wait-and-see approach. There are a few signs that growth is slowing, but slowing is different than slow. Bigger picture, it’s hard to gripe about 250k jobs a month with a 4.0% unemployment rate.

What’s next?

Anirban is working on Week in Review, our every Friday post where we concisely cover everything you need to know about the economy, and that will be out in a few hours. That’s just for paying subscribers. If that’s not you and you want it to be, just click the button below:

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