United States: Unemployment rate declines to lowest level in 16 years despite weak payroll growth
June 2, 2017
Although the May report leaves the Federal Reserve on track to hike interest rates at its upcoming 13-14 June monetary policy meeting, details were mixed if not downright negative. Non-farm payrolls rose by 138,000 in May, which confounded market analysts who had expected 185,000 new jobs. The print was also below April’s reading, when employers added 174,000 additional jobs, according to revised figures (previously reported: +211,000).
Looking at the details, job creation was solely driven by the private sector. Healthcare and education services once again added the most to new payrolls with 47,000 new jobs, followed by business (+38,000) and leisure and hospitality services (+31,000). Elsewhere, hiring was much weaker. Manufacturing employment surprisingly declined and construction and mining and logging registered mediocre increases. Meanwhile, government staffing levels decreased in May as hiring at the federal level was more than offset by cutbacks in local and state administrations.
The report’s silver lining was the unemployment rate, which dropped in May to 4.3%, the lowest level since May 2001 and a notch below April’s 4.4% print. This figure, however, was largely influenced by a decline in the labor force participation rate to a six-month low of 62.7%. Average hourly earnings were also unchanged at 2.5%, a puzzling detail considering the jobs market is nearing full employment and shortages of skilled workers are increasingly being reported.
The Federal Reserve is unlikely to be deterred from increasing interest rates despite signs of slack in non-services and government hiring. Although wage growth has repeatedly failed to gather steam, a further tightening in the labor market is likely eventually to lead to higher earnings and thus higher inflation. With economic growth also expected to rebound in Q2 after nearly running aground in the first quarter, everything suggests that officials will hike rates in June. 71% of our panel of economists currently expects an interest rate increase.
Author: David Ampudia, Economist