What to Expect in the May U.S. Jobs Report

Jun 02, 2017

U.S. job growth likely remained strong in May, a further sign of an acceleration in economic activity that would effectively seal the case for an interest rate increase this month despite sluggish wage gains.

Nonfarm payrolls probably increased by 185,000 jobs last month, according to a Reuters survey of economists, after surging 211,000 in April. May's projected increase would be in line with this year's 185,000 average monthly job growth.

The unemployment rate is forecast unchanged at a 10-year low of 4.4%. It has dropped four-tenths of a percentage point this year. The Labor Department will release its closely watched employment report on Friday, less than two weeks before the Federal Reserve's June 13-14 policy meeting.

"Another strong jobs report would help the Fed proceed with another rate hike at its June meeting, by supporting its contention that recent weakness in retail sales and inflation data will prove transitory," said Josh Wright, chief economist with recruitment software provider iCIMS in Matawan, New Jersey.

U.S. financial markets have almost priced in a 25 basis points increase in the Fed's benchmark overnight interest rate this month, according to CME FedWatch.

Minutes of the Fed's May 2-3 policy meeting, which were published last week, showed that while policymakers agreed they should hold off hiking rates until there was evidence the growth slowdown was transitory, "most participants" believed "it would soon be appropriate" to raise borrowing costs.

The U.S. central bank raised interest rates by 25 basis points in March. Data on consumer spending and manufacturing suggest the economy gained speed early in the second quarter after gross domestic product increased at a tepid 1.2% annualized rate at the start of the year.

The Atlanta Fed is forecasting GDP increasing at a 4.0% pace in the second quarter.

But persistently sluggish wage growth could cast a shadow on further monetary policy tightening. Average hourly earnings are forecast rising 0.2% in May after gaining 0.3 percent in April.

That would keep the year-on-year increase in wages at 2.5%. Average hourly earning could, however, surprise on the low side because of a calendar quirk.

A soft average hourly earnings reading would come as annual inflation rates have retreated in recent months. But with the labor market expected to hit full employment this year, there is optimism that wage growth will accelerate.

Skills Shortage

There is growing anecdotal evidence of companies struggling to find qualified workers. The Fed in its Beige Book on Wednesday said a manufacturing firm in the Chicago district reported raising wages for unskilled laborers by 10% to attract better-quality workers and retain its workforce.

The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

Republican President Donald Trump, who inherited a strong job market from the Obama administration, has vowed to sharply boost economic growth and further strengthen the labor market by slashing taxes and cutting regulation.

There are, however, fears that political scandals could derail the Trump administration's economic agenda.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, could have risen last month as college graduates enter the labor force. It has rebounded from a multi-decade low of 62.4% in September 2015 and economists see limited room for further gains as the pool of discouraged workers shrinks.

"We suspect there is only limited scope for the prime age participation rate to keep rising," said Michael Pearce, a U.S. economist at Capital Economics in New York. "If that proves accurate, wage pressures are likely to build a little more rapidly over the coming years than over the past few."

Manufacturing employment likely increased, but payrolls in the automobile sector could decline amid falling sales. Ford Motor (f) said last month it planned to cut 1,400 salaried jobs in North America and Asia through voluntary early retirement and other financial incentives.

Further job gains are likely in construction. Retail payrolls are a wild card as department store operators like J.C. Penney (jcp), Macy's (m) and Abercrombie & Fitch (anf) struggle against stiff competition from online retailers led by Amazon (amzn).

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