The US jobs report came in south of expectations, with non-farm payrolls increasing by 559,000 in May but the unemployment falling to a pandemic low of 5.8% vs 6.1% in April. While the job gains were double, the upwardly revised April total of 278,000, the fact that they were short of expectations means the Fed can remain on hold indefinitely. In the absence of other mitigating data, that’s actually supportive of risk assets due to the looseness of financial conditions.
If you recall, yesterday’s numbers from ADP and initial claims showed upside momentum. And that makes todays’s miss all the more disappointing, because, at the margin, these beats would have lifted expectations for 650,000 jobs. But now, we have to explain why we are seeing such tepid growth in employment in an economy 7.5 million jobs short of pre-pandemic levels.
It’s the decline in the labor participation rate that is the most salient factor in understanding the data. That pushed the unemployment rate down to 5.8%, despite the lower than expected NFP number. And it speaks to the inability or unwillingness of some workers to return to the labor force due to COVID concerns, childcare issues and pandemic unemployment assistance.
The good thing for workers is that the beat in average hourly earnings, which were up 0.5% month-on-month and well ahead of expectations for a 0.2% rise. Going back to my June 1 framing, wage growth leads. The sequence is wages to consumption to production to business spending and corporate profits. So we continue to have the underpinning of a durable pickup in consumption, notwithstanding the worries about inflation.
Overall, this miss is one of those bad news is good news outcomes, where the data keep the Fed on the sidelines, maintain the accommodative status quo, and, thus, support asset prices. And, at the same time, the uptick in wages acts as a building block for continued consumption growth after government support wanes since wages are sticky.