US job market remains strong

• The latest employment report from the US government offers conflicting inferences. The US government releases two reports: one based on a survey of establishments; the other based on a survey of households. The establishment survey found stronger-than-expected job growth in May, with broad-based gains in employment. It was the second-biggest increase since September 2022. Also, the establishment survey found a deceleration in wages, which is favorable in terms of suppressing inflationary pressures.

However, the household survey found stagnant labor force participation, a decline in employment, and an increase in the number of unemployed. In fact, the unemployment rate increased to the highest level since October. The household survey includes the self-employed, which might partially explain the discrepancy between the household and establishment surveys. Moreover, although the participation rate was unchanged, the participation rate for those 25 to 54 hit a 16-year high. Finally, the household survey data tends to be more volatile than the establishment data and tends to have a larger margin of error. Thus, it should be taken with a grain of salt. Overall, the strong establishment data suggests a continued healthy job market in the United States.

Here are the details: According to the establishment survey, 339,000 new jobs were created in May. In addition, estimated employment growth for the two previous months was upwardly revised. Private sector employment growth was 283,000. There was almost no growth of employment in mining and a small decline in manufacturing. However, construction employment increased sharply.

On the services side, there was modest growth of employment in retailing and strong growth for transportation and warehousing. There was modest growth in financial services, with a decline in banking offset by an increase in other areas of finance, especially insurance. Professional and business services saw a sharp increase of 64,000 as did health care and social assistance, up 74,600. Leisure and hospitality were up a strong 48,000, largely driven by the restaurant industry. Finally, government employment was up 56,000, almost entirely driven by gains in state and local government. Thus, employment growth was a characteristic of most industries. The weakness of manufacturing stands out and is consistent with other indicators, such as the purchasing manager’s index (PMI), pointing to declining manufacturing activity.

Also, the establishment report examined wage behavior. It found that average hourly earnings of all US workers were up 4.3% in May versus a year earlier, the smallest increase since June 2021. Wage inflation had peaked in March 2022 at 5.9%. The deceleration in wages likely reflects two factors. First, inflation is decelerating, thereby reducing the need for workers to seek big pay gains. Second, increased participation by primary-aged workers has eased some of the tightness in the labor market. Decelerating wage gains mean that the labor market is still not contributing to inflation. If wages continue on this path, it will be easier for the Federal Reserve to achieve its target of 2% inflation. Yet if the tightness of the job market leads to sticky wage gains, the Fed will likely have a more difficult time in suppressing inflation.

The separate survey of households found that the labor force increased more slowly than the working-age population. It also found that the number of employed fell and those reporting being unemployed rose significantly. The result was that the unemployment rate increased from 3.4% in April to 3.7% in May, the highest since October 2022. Still, this is one of the lowest unemployment rates in the last half century. Meanwhile, most of the increase in unemployment was due to people either being dismissed or having completed temporary assignments.

Investors greeted the employment report favorably. US equity prices rose moderately on expectations that the US economy will perform well this year and potentially avoid recession. In addition, bond yields increased slightly. While some Wall Street economists still expect a recession sometime this year, our Deloitte economics team in the United States believes that there is a low probability of a recession. Of course, much will depend on what the Fed does. The general view in markets is that the Fed will soon pause monetary tightening and wait to see what happens. The employment data suggests the possibility that the United States could be in an unusually favorable position of continued economic strength and decelerating inflation. The question now is how long this can last.