US labor market surprises again

Employment in the US rose unexpectedly strongly by 272 thousand in May, while growth in hourly wages accelerated again.

Bernd Weidensteiner

Commerzbank Economic Research

June 7 2024

In contrast, the unemployment rate based on another survey rose slightly to 4.0%, the highest level since January 2022. The data do not suggest that the Fed will cut interest rates in the near future.

Strong job growth...

The US labor market has once again surprised forecasters: at 272 thousand, job growth in May was almost 100 thousand higher than predicted. Job growth was broad-based, with only a few sectors recording a decline in employment. There have been no signs of weakness in the payrolls so far. The six-month average, which smoothens out the usual short-term volatility in employment changes, has even risen slightly to 255 thousand. All in all, job growth has been very stable for over a year.

The average hourly wage rose by 0.4% compared to the previous month, after +0.2% in April. This was also stronger than expected. In a year-on-year comparison, wages rose by 4.1%.

... and a slight increase of the unemployment rate

However, the other part of the labor market report, the household survey, paints a different picture. The alternative employment figure recorded by this survey has fallen and the unemployment rate has risen to 4.0% (it had been below 4% since February 2022). In May, it was 0.6 percentage points higher than its low around a year ago.

The household survey has a much smaller sample size than the establishment survey (the basis of the non-farm payrolls data). It therefore tends to be significantly more volatile. One possible reason for the poorer development of employment figures in the household survey over the last two years (an increase of 2.8 million compared to 6.6 million in the payrolls survey) may be the inclusion of the large number of immigrant workers. These are better covered in the establishment survey; the household survey is likely to lag behind significantly here. We would therefore emphasize the strong job gains in non-farm employment rather than the household survey figures.

With job gains of over 250k, the labor market continues to run quite hot. However, there are signs of a slowdown elsewhere. In April – the latest available figures – there were still just under 8.1 million vacancies, 4 million fewer than at the peak two years ago. This indicates a gradual normalization of demand for labour.

No rate cuts anytime soon

The Fed will therefore have to wait and see. The labor market continues to perform too well to provide any real relief from inflationary pressure. At the same time, the strong job growth reduces the risk of an economic slowdown. Our forecast that the Fed will not cut key interest rates for the first time until December is confirmed.

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