U.S. Job Market Beats Expectations, Raises Concerns of Rate Cut Delay
The U.S. job market delivered better-than-expected results in May, creating 272,000 new jobs and topping economists’ estimates. The data defied previous observations that the labor market might be cooling off and challenged investor expectations of an early rate cut by the Federal Reserve.
The unemployment rate saw a slight increase to 4 percent, up from 3.9 percent in April. This surpassed market projections, which had anticipated the rate to remain steady. On the positive side, average hourly earnings rose by 0.4 percent, exceeding expectations, and reached a year-over-year increase of 4.1 percent.
Despite the overall positive job growth, there was a noticeable divergence between full-time and part-time employment. Full-time jobs experienced a significant loss of 625,000, while part-time jobs increased by 286,000. This trend suggests a shift towards a gig economy, where more people are opting for multiple jobs instead of traditional full-time employment.
Another concerning trend is the gap between foreign-born and native-born workers. In May, 414,000 foreign-born workers gained employment, while 663,000 native-born workers lost their jobs. This discrepancy may raise questions about the impact of immigration policies on the labor market.
The establishment survey, which factors in every job a household member has, reported 272,000 new jobs. However, the household survey, which avoids duplication, reported a concerning figure of 408,000 lost jobs. This discrepancy highlights the need for further analysis and caution when interpreting employment data.
Bryce Doty, Senior Vice President and Senior Portfolio Manager at Sit Investment Associates, suggests that the rising unemployment rate combined with an increase in wages may indicate a slowing economy with above-trend inflation. While some fear stagflation, Doty believes it’s more likely a case of a slowing economy with inflation in the 3% range.
The financial markets had a negative reaction to the jobs data, with benchmark indexes down as much as 0.4 percent in pre-market trading. U.S. Treasury yields also experienced an increase, with the benchmark 10-year yield reaching 4.41 percent. The U.S. Dollar Index (DXY) saw a surge of 0.51 percent, raising concerns that the strong jobs report could make it more challenging for the Federal Reserve to cut interest rates.
Mark Hamrick, Senior Economic Analyst at Bankrate, suggests that the U.S. labor market is slowly coming into better balance after the volatility and disruption caused by the pandemic. The recent decline in job openings and moderation in quits indicate a normalization of the job market.
While initial jobless claims and continuing jobless claims have increased slightly, layoffs have not accelerated. In fact, U.S.-based employers announced plans to cut 1.5 percent fewer jobs in May compared to April, and layoffs on a year-to-date basis are down 7.6 percent compared to the same period in 2023.
The latest jobs report has implications for the Federal Reserve’s monetary policy decisions. Fed officials have emphasized the need for patience before considering an interest rate cut. With a relatively stable labor market and a growing economy, the central bank is waiting for more positive inflation data before making any moves. The upcoming consumer price index (CPI) report will play a crucial role in determining whether a rate cut is necessary.
For now, investors are predicting a rate cut at the September meeting, according to the CME FedWatch Tool. The Federal Open Market Committee (FOMC) will hold its next policy meeting on June 11 and 12, where they will release updated economic projections. These projections will provide insight into how many rate cuts the Fed expects to make. In March, officials maintained their forecast of three rate cuts, but with inflation progress stalling, some policymakers may revise their outlooks.
