Hot Jobs Report Leaves No Room For Timid Fed

The US economy added 390,000 jobs in May, Friday’s NFP report showed.

That was more than expected (figure below). Consensus was at 317,500 when the numbers were released.

The headline print counted as “hot,” certainly by pre-pandemic standards, but also in the context of forecasts. The range of estimates, from nearly six-dozen economists, was 220,000 to 450,000.

There’s little evidence to suggest the labor market is rolling over and that, in turn, makes the case for a resolute Fed in the face of generationally high inflation.

March’s headline was revised lower, April’s higher. On net, revisions subtracted 22,000 from the prior two months. That’s a non-event.

At the current juncture, good news can be bad news to the extent a still-hot economy argues for aggressive Fed tightening. On the other hand, the recession chorus is growing. This week alone, a who’s who of executives, including Elon Musk, warned of a possible recession. In that context, data which suggests the economy is resilient is a welcome development. You can write your own narrative. Everyone else is.

On Thursday, ADP data suggested private sector hiring in May was the weakest of the pandemic recovery. Small businesses find themselves in a particularly challenging position, as soaring wage costs make it difficult to compete with large, deep-pocketed corporations for scarce workers. Friday’s government report showed nonfarm private payrolls rose 333,000 last month, more than expected.

Hiring in leisure and hospitality was steady, but the three-month pace continued to moderate. Employment in the sector increased by 84,000 in May (figure below). More than half of the gain was attributable to food services and drinking places.

Leisure and hospitality employment is still 1.3 million positions short of pre-pandemic levels, or around 8% (figure below).

At the current pace, it’d take a year and a half to recoup the entirety of the remaining losses.

Considering the distinct possibility that the economy will fall into recession at some point over the next 18 months, it’s reasonable to assume the shortfall in leisure and hospitality won’t be recouped. Or at least not this cycle.

Remember: This is the sector that makes life feel “normal” for many Americans. If leisure and hospitality never fully recovers pre-pandemic levels of employment, that’ll say a lot about the economic legacy of COVID.

Moving along, manufacturing payrolls were well short of consensus at 18,000, but have now very nearly recovered pandemic losses. Construction added 36,000 jobs, and is now well above pre-pandemic levels.

Perhaps tellingly, retail shed 61,000 positions last month. The losses were widespread across the sector. That’s consistent with retail earnings, which were very troubling, notwithstanding some bright spots.

It was just the fourth monthly decline since the original COVID lockdowns, and by far the largest (figure above).

What matters in the very near-term for policymakers is wage growth. The Fed is keen to play down the risk of a wage-price spiral, even as most contend that most pernicious of dynamics is already embedded in the economy. Average hourly earnings rose 0.3% MoM in May, Friday’s data showed. That was cooler than expected. On a 12-month basis, wages rose 5.2%, in line with consensus, and still very elevated.

The participation rate ticked higher to 62.3% and the unemployment rate stuck at 3.6% against expectations for a downtick.

All in all, there was nothing in the numbers to dissuade the Fed from its current plan to hike rates 50bps at both the June and July meetings. Jobs reports like May’s aren’t conducive to any “pause.” Not when inflation is scorching-hot.

“Lael Brainard’s comments have done little to dissuade the market from firming up the pricing for 50bps in September and we’re anticipating a consensus or better NFP will effectively serve as confirmation,” BMO’s Ian Lyngen and Ben Jeffery remarked. Brainard on Thursday told CNBC “it’s very hard to see the case for a pause” in the Fed’s hiking cycle.

“The US economy added more jobs than expected in May, but with nearly two job vacancies available for every unemployed American, the numbers would be even stronger if there was a better supply of quality labor,” ING said. “This is both a constraint on growth while contributing to ongoing elevated inflation via higher wages.”

Finally, I’d note that going forward, it’ll become increasingly difficult to discern what part of any burgeoning slowdown in the labor market is attributable to worker shortages and what’s explainable by reference to a loss of momentum in the broader economy.