The United States economy created considerably more jobs in May than anticipated, allaying concerns about a downturn in the labour market and possibly lessening the Federal Reserve’s incentive to cut interest rates.

The Labour Department’s Bureau of Labour Statistics announced on Friday that nonfarm payrolls increased by 272,000 for the month, up from 165,000 in April and much above the Dow Jones consensus forecast of 190,000.

Simultaneously, the rate of unemployment increased to 4%, marking the first instance of it crossing that threshold since January 2022. The rate was predicted by economists to remain at 3.9% starting in April.

The labour force participation rate dropped by 0.2 percentage points to 62.5%, notwithstanding the rise. The number of respondents who reported having a job decreased by 408,000, according to the household survey used to calculate the unemployment rate.

The news was impressive at first glance, but there was a greater decline in household employment, according to Liz Ann Sonders, chief financial strategist at Charles Schwab. In all honesty, that is usually a more reliable indicator when the economy is about to turn. There are gaps in the underlying statistics.

A more comprehensive measure of unemployment, which accounts for discouraged workers and people working part-time due to financial constraints, remained stable at 7.4%.

According to the household survey, there was a 625,000 decrease in full-time workers and a 286,000 increase in part-time workers.

Consistent with previous trends, the health care, government, leisure, and hospitality sectors saw the largest increases in employment. There were additions of 68,000, 43,000, and 42,000 jobs in each of the three industries. Over half of the improvements were attributed to these three areas.

Retail (13,000), social assistance (15, 000), and professional, scientific, and technological services (32,000) were the other major growth areas.

In terms of pay, average hourly earnings increased by 4.1% year over year and by 0.4% on a monthly basis, exceeding expectations. The forecasts for growth were 3.9% and 0.3%, respectively.

Following the announcement, Treasury rates increased as stock market futures lost ground.

“One step forward, two steps back. Today’s data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut,” said Seema Shah, chief global strategist at Principal Asset Management. “Not only has jobs growth exploded again, but wage growth has also surprised to the upside, both moving in the opposite direction to what the Fed needs to begin easing policy.”

Revisions to previous months’ data were minor: the rise for March was trimmed to 310,000 from 35,000, and the growth for April was trimmed to 165,000 from 10,000.

Investors are nervous about the length of time the Fed will maintain its benchmark borrowing rate at its highest point in over 23 years in light of the news. Policymakers have shown in recent weeks that they are reluctant to reduce anytime soon as long as inflation is over the central bank’s 2% objective.

According to Sonders, the Fed saw the report as “certainly hawkish,” which means that the data lessens the likelihood that the central bank would lower rates anytime soon.

According to the CME Group’s FedWatch measure, traders in the fed funds futures market decreased the likelihood of a reduction in September to about 56% after the employment data. On Thursday, it had decreased by almost 12 percentage points. From over 68% a day ago, the market-implied chance of a second move down in December dropped to roughly the flip of a coin.

Since the beginning of the COVID epidemic in 2020, the Fed has not decreased rates, and between March 2022 and July 2023, it raised rates eleven times. Currently, the target range for the benchmark federal funds rate is 5.25%–5.5%.

(Adapted from NPR.org)

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