Important Points to Keep an Eye on in May’s Friday Jobs Report

Observing the monthly jobs reports this year has been a exercise in patience, as economists and market participants wait for a downturn that never seems to materialize.

This pattern is likely to continue on Friday when the Labor Department releases its nonfarm payrolls count for May. According to Dow Jones’ survey of economists, job growth of 190,000 is expected, a slowdown from the 253,000 jobs added in April. This is below the 2023 monthly average of 284,500 and the lowest monthly gain since December 2020.

However, considering the trend of these reports, the risk is likely to be on the upside in a job market that has exhibited remarkable resilience. The jobs count has exceeded consensus estimates in 13 out of 16 instances since January 2022.

“The labor market still appears strong. Job openings are at a high level, and unemployment is at an all-time low. We anticipate further job gains, in fact, slightly above consensus,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “I would advise people to focus on the prevailing trend.”

Despite the headline numbers defying market expectations, LaVorgna acknowledges some underlying weakness.

According to the latest Labor Department data released on Wednesday, total job openings in April increased to 10.1 million, but the crucial leisure and hospitality industry experienced a nearly 6% decline. This could spell trouble for a sector that has added over 900,000 jobs in the past year.

In addition, the April nonfarm payrolls report revealed that job growth estimates for the previous two months were revised downward by 149,000, indicating that the job market wasn’t as robust earlier this year as initially thought.

“We’re currently approaching an inflection point,” said LaVorgna, who served as chief economist for the National Economic Council under former President Donald Trump. “I don’t believe it will occur in May, but given the level of tightening in the economy orchestrated by the Fed and the increased stringency of lending standards, the labor market is likely to weaken. Historical data suggests that when it happens, it happens rapidly.”

The tight labor market and the resulting pressure on wages and inflation has presented a challenge for the Federal Reserve. Despite the central bank’s ten interest rate hikes since March 22, inflation remains well above the Fed’s 2% target.

However, policymakers have indicated that they may refrain from raising rates again at their upcoming meeting in June as they assess the impact of their policy tightening.

“A decision to keep our policy rate unchanged at the next meeting should not be interpreted as a sign that we have reached the peak rate for this cycle,” stated Fed Governor Philip Jefferson in a speech on Wednesday. “Indeed, skipping a rate hike would allow the [rate-setting Federal Open Market Committee] to gather more data before making decisions regarding the extent of further policy tightening.”

One key area of focus for policymakers will be average hourly earnings.

There is an expectation of a 0.3% increase in wages for the month of May, and a 4.4% increase from a year ago. Officials have claimed that this level of wage growth is not consistent with achieving 2% inflation. However, May could bring some positive developments in this regard.

Data from Homebase indicates that wages for small and medium-sized businesses declined by 0.2% in May, marking the first monthly decline since 2021. This occurred despite a 0.64% increase in the number of employees and a 1.16% increase in hours worked.

Payroll processing firm ADP reported on Wednesday that wages for workers who remained in their jobs increased by 6.5% in May, still a high figure but a deceleration compared to previous months. ADP also reported that private payrolls grew by a higher-than-expected 278,000 in May.

A Federal Reserve report on Wednesday noted that wages grew “modestly,” aligning with the observations made in the “Beige Book” regarding the state of the job market.

“Overall, the labor market continued to exhibit strength, with contacts reporting difficulty finding workers across various skill levels and industries,” the report stated. It also mentioned that some employers mentioned that they were “fully staffed,” while others said that they were either pausing hiring or reducing headcounts due to weaker demand or increased uncertainty about the economic outlook.

The unemployment rate in May is expected to increase slightly to 3.5%, which would still be close to the lowest level since 1969.