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Job Gains Surged Again In May, Dashing Hopes of a Sustainable Slowdown

Fed cuts will more likely depend on inflation, not the job market.

Illustration of capital building with bubbles of currency inflating

Job growth reaccelerated in May after slowing in April, underscoring the labor market’s resilience even as interest rates remain at historic highs.

The Bureau of Labor Statistics reported that nonfarm payroll employment rose by 272,000 in May, well above consensus expectations for 180,000. The report painted a somewhat mixed picture, however. Job growth was strong but the unemployment rate rose, and hotter-than-expected wage growth pointed to inflation slightly above the Federal Reserve’s 2% target.

Investors have been looking to the jobs market for signs of healthy moderation, which could indicate that the economy has escaped damage from high rates and that a soft landing might be in sight, giving the Fed the green light to cut rates should inflation improve. However, too much strength in the jobs market could indicate an overheating economy and further delay cuts.

“Clearly, markets had staked too much hope on the imminent slowdown in jobs growth interpreted from last month’s data,” says Preston Caldwell, chief US economist at Morningstar. He cautions that one month of data does not make a trend. “People and markets are overreacting to month-to-month fluctuations in a noisy data series,” he says, referring in part to a dramatic surge in bond yields immediately after the report was released.

Monthly Payroll Change

May Jobs Report Key Stats

  • Total nonfarm payrolls climbed by 272,000 versus a downward-revised 165,000 (from the originally reported 175,000) in April.
  • The unemployment rate ticked up to 4.0% from 3.9% in April.
  • Average hourly wages climbed by 0.4% to $34.91 after rising 0.2% in April.

While May’s job gains may seem dramatic after April’s decline, Caldwell points out that on a three-month annualized basis, nonfarm payroll employment growth is 1.9%, “exactly where it was a month ago.” He points to his previous assertion that labor demand and supply are expanding briskly despite the slowdown in April’s data.

Perhaps counterintuitively, the unemployment rate is rising while employers add new jobs. Caldwell attributes this difference to methodology. The unemployment rate is calculated using a household survey separate from the employer survey used to calculate job gains. “The weakness in the household survey employment is why the unemployment rate has started to tick up, reaching 4% in May, after troughing at around 3.5% in the first half of 2023,” he explains.

Unemployment Rate

Healthcare and Government Jobs Lead the Way

The BLS said job gains in May were led by the healthcare, government, and leisure and hospitality sectors. Healthcare and leisure jobs have grown at a 3.6% annualized rate over the past three months, Caldwell says. They account for just over half of aggregate job gains.

Selected Payroll Categories

Three-month increase.

Wage Gains Little Changed

While the month-over-month change in job gains also looks dramatic, Caldwell points out that the annual rate of 4% job growth in May is not much different from the 3.9% annual rate reported in April. “Assuming productivity growth of 1.5%, 4.0% wage growth is consistent with 2.5% inflation, not far from the Fed’s target,” he says.

Monthly Wage Growth

When Will the Fed Cut Rates?

The central bank is almost universally expected to hold rates steady at its meeting next week. Investors will be anxiously watching for clues about the likely path of monetary policy for the remainder of the year. The recent resilience in the jobs market means progress on inflation, which has remained sticky in the first half of the year, will likely hold more weight with Fed policymakers.

“While markets think today’s data matters a lot for the Fed, really it shouldn’t amount to more than a small tweak to their assessment of the economy,” Caldwell says. “The jobs market is not clearly signaling whether to maintain a tight monetary policy or to loosen. The inflation data will remain the prime determinant of whether the Fed cuts in 2024.” He expects the first rate cut to come in September as inflation moderates.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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