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United States Unemployment May 2018

United States: Unemployment rate reaches a near two-decade low, while wage growth firms up in May

U.S. non-farm payrolls expanded at a strong pace in May, evidencing the continued fundamental robustness of a U.S. economy which just logged its 92nd consecutive month of job creation, the longest streak on record. The economy added 223,000 jobs in May, well above the downwardly revised 159,000 new jobs created in April (previously reported: +164,000), and ahead of market expectations of 190,000 jobs. The robust number of jobs created in the month, in an economy considered by many analysts to be very close to full employment, suggests that upward wage pressures might be gaining traction.

The job market expansion was again broad-based in May, with employment gains across a wide range of sectors. Hiring activity remained robust in goods-related sectors, with solid increases in construction (+25,000) and more moderate gains in manufacturing (+18,000). In the service sector, payroll gains were quite evenly distributed across industries. Retail trade payrolls increased 31,000 after an essentially flat reading in April, while 19,000 new jobs were created in the transportation and warehousing industry. Professional and business services added 31,000 jobs in the month, a deceleration compared to the growth logged in past months, but education and healthcare services recorded a robust 39,000 new jobs in May, largely driven by high demand for ambulatory healthcare professionals, as well as for personnel in hospitals and nursing care facilities. Lastly, the hospitality industry added 21,000 jobs in May, while other sectors, such as government and financial services, recorded negligible employment growth.

The unemployment rate edged down from 3.9% in April to 3.8% in May, the lowest level since April 2000, beating analysts’ expectations of a stable reading. However, the labor participation rate eased to a four-month low of 62.7%, indicating that the lower unemployment rate was not entirely due to the strong payroll gains observed.

Accompanying the tightening labor market, wage inflation inched up to 2.7% in May from 2.6% in April. In month-on-month terms, average hourly earnings grew 0.3% in May, up from a meager 0.1% increase in April and above analysts’ estimates of 0.2% growth. Wage growth picking up pace was one of the more positive news of the May jobs report, as the relative sluggishness of wage growth in previous months has been a source of concern. The May wage growth data appears to reflect a sweet spot for the U.S. economy: strong enough to signal that wage pressure is gaining momentum, which should be reflected by positive effects on domestic spending over the medium-term, but not enough to urge the Federal Reserve into ramping up its tightening of monetary policy ahead of schedule. As it stands, the May figure should support the Fed in its probable move—overwhelmingly expected by our panelists—to raise rates by 25 basis points at its next FOMC meeting, on June 12–13.

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