The job market has been strong in recent months, and most traders expect the Federal Reserve to raise interest rates later this month, despite the slightly weaker May figure. Yet further negative news could cause the Fed to reconsider its plan of gradually raising interest rates later this year, as the central bank eases off its efforts to stimulate the economy.
“The overall report still leaves the Fed on target for June, but it underscores their trepidation about moving in December,” said Diane Swonk, a Chicago-based economist. “They’ve got good reason to be cautious.”
The unemployment rate was down slightly from 4.4 percent last month, a figure economists had already seen as low. Yet economists said the drop was due in part to a contraction in the labor force, since the unemployment rate measures only those who are actively looking for work but can't find it. The labor force participation rate declined by 0.2 percentage points to 62.7 percent in May.
“The unemployment rate fell for all the wrong reasons,” said Elise Gould, a senior economist at the Economic Policy Institute. “The slight drop in the unemployment rate is due to would-be workers leaving the labor force and not getting jobs.”
To some economists, these trends suggest that the economy is already well on its way to providing some kind of a job for nearly all Americans who are willing and able to work. “The May number makes it look more likely that we have hit a plateau with people coming back off the sidelines,” said Jed Kolko, chief economist for jobs site Indeed.
The employment gains were led by the service sector, including health care, which has seen business expand as America's aging population demands more medical services. The mining sector, which has been a focus of President Trump's, also added 7,000 jobs, continuing a rebound since a low point in October 2016. Yet the manufacturing sector shed jobs — a reminder, said Kolko, that most of America's growth is now coming from services.
Secretary of Labor Alexander Acosta called the jobs additions “a positive sign that our economy is moving in the right direction.”
“More than 600,000 private-sector jobs have been created since Inauguration Day,” he said. “These continued improvements have real impact on the lives of American families, as more people take home a paycheck.”
The Labor Department also revised its estimates for job gains in March and April, lowering the combined figure by 66,000 jobs. Average hourly earnings were up by 2.5 percent from the previous year to $26.22, continuing a streak of relatively weak wage growth.
As the economy continues to expand and reaches a point where nearly everybody who wants a job can find one — what economists call full employment — companies should have to start raising wages to attract new workers.
But although the U.S. economy has been adding jobs at a furious pace, workers still aren’t seeing very rapid wage growth.
Economists are divided about what exactly is causing this, said Mark Zandi, chief economist at Moody’s Analytics. Some believe the United States is not yet at full employment, because we are still not seeing a significant pickup in wage growth. Others, like Zandi, believe that the United States has reached full employment, but that wage growth is just lagging behind a bit, and will pick up in coming months.
Low productivity growth and the relatively low skill level of many American workers who are getting pulled into the labor market are likely holding back a more rapid increase in wages, Swonk said. She also pointed to the replacement of more highly paid retiring baby boomers with more lowly paid millennials.
The job number and the unemployment rate are calculated using two separate federal surveys, which sometimes leads to divergent results. The margin of error for the jobs report is also substantial, and the figure is sometimes revised significantly in following months.
Ian Shepherdson, chief economist at Pantheon Macroeconomics, points out that the survey was also carried out relatively early in the month in May, meaning it may have missed out on seasonal hiring that builds through Memorial Day. “The headline payroll number looks to me to have been distorted by the early survey,” he said.
Most traders believe the Fed is highly likely to hike interest rates at its upcoming meeting on June 13-14. As of Friday morning, traders saw a 93.5 percent chance of a rate hike.
Minutes from the Fed’s May 2-3 meeting that were released last week showed that some central bankers were concerned that progress toward the Fed’s inflation target had slowed. Yet most still judged that the Fed should hike rates “soon” if economic data came roughly in line with their expectations.
“Fed officials have noted the weakness in inflation numbers of the past few months but have been willing to discount it as temporary,” said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch. “If we get another weak report, it makes it a lot harder to credibly argue that this is just temporary weakness.”