US: Employment Situation

Fri Jun 01 07:30:00 CDT 2018

Consensus Consensus Range Actual Previous Revised
Nonfarm Payrolls - M/M change 190,000 155,000 to 220,000 223,000 164,000 159,000
Unemployment Rate - Level 3.9% 3.8% to 4.0% 3.8% 3.9%
Private Payrolls - M/M change 184,000 150,000 to 217,000 218,000 168,000 162,000
Manufacturing Payrolls - M/M change 18,000 8,000 to 25,000 18,000 24,000 25,000
Participation Rate - level 62.8% 62.8% to 62.9% 62.7% 62.8%
Average Hourly Earnings - M/M change 0.2% 0.1% to 0.3% 0.3% 0.1%
Average Hourly Earnings - Y/Y change 2.7% 2.6% to 2.8% 2.7% 2.6%
Av Workweek - All Employees 34.5hrs 34.5hrs to 34.5hrs 34.5hrs 34.5hrs

Employment growth is strong and it is not entirely without wage pressure. Nonfarm payrolls rose 223,000 in May to just top Econoday's high estimate while the unemployment rate moves down a tick to a new expansion low of 3.8 percent. The monthly gain for average hourly earnings came in at the high end of expectations, up 0.3 percent for a year-on-year rate that is up a tenth to 2.7 percent.

Payroll gains are led by trade & transportation, up 53,000 in the month for a sector where delivery delays have been climbing, and include solid 31,000 gains for both retail and also professional & business services with the gain for the latter suggesting that employers are scrambling to fill positions. Manufacturing payrolls rose 18,000 which hits Econoday's consensus with construction payrolls up 25,000.

The participation rate moves down a tenth to an even thinner 62.7 percent as the number of people actively looking for work is down 281,000 to 6.065 million. The workweek for all employees is unchanged at 34.5 hours though factory hours and factory overtime are down which point to give back for May's industrial production report.

But today's report is about strength and the risk that available slack in the labor force is disappearing and in turn raising the potential of wage inflation. The results clearly support expectations for a rate hike at this month's FOMC.

Market Consensus Before Announcement
Following a solid April, nonfarm payrolls are expected to extend their strength to May where Econoday's consensus is calling for a 190,000 rise. The unemployment rate, down 2 tenths to 3.9 percent, was the highlight of the April report with May's rate seen holding at 3.9 percent. A surprise in the April report was a lack of wage pressures and only marginally higher readings are expected for May, at 0.2 percent for monthly growth in average hourly earnings and a 1 tenth climb in the year-on-year rate to 2.7 percent. Private payrolls are expected to rise 184,000 with manufacturing payrolls seen increasing 18,000. The workweek is seen unchanged at 34.5 hours and the labor participation rate slipping 1 tenth in the month to 62.8 percent.

The most closely watched of all economic indicators, the employment situation is a set of monthly labor market indicators based on two separate reports: the establishment survey which tracks 650,000 worksites and offers the nonfarm payroll and average hourly earnings headlines and the household survey which interviews 60,000 households and generates the unemployment rate.

Nonfarm payrolls track the number of part-time and full-time employees in both business and government. Average hourly earnings track employee pay while the average workweek, also part of the establishment survey, tracks the number of hours worked. The report's private payroll measure excludes government workers.

The unemployment rate measures the number of unemployed as a percentage of the labor force. In order to be counted as unemployed, one must be actively looking for work. Other commonly known data from the household survey include the labor supply and discouraged workers.

If ever there was an economic report that can move the markets, this is it! The anticipation on Wall Street each month is palpable, the reactions can be dramatic, and the information for investors is invaluable. By digging just a little deeper than the headline unemployment rate, investors can take more strategic control of their portfolio and even take advantage of unique investment opportunities that often arise in the days surrounding this report.

The employment data give the most comprehensive report on how many people are looking for jobs, how many have them, what they're getting paid and how many hours they are working. These numbers are the best way to gauge the current state as well as the future direction of the economy. Nonfarm payrolls are categorized by sectors. This sector data can go a long way in helping investors determine in which economic sectors they intend to invest.

The employment statistics also provide insight on wage trends, and wage inflation is high on the list of opponents of easy monetary policy. Fed officials constantly monitor this data watching for even the smallest signs of potential inflationary pressures, even when economic conditions are soggy. If inflation is under control, it is easier for the Fed to maintain a more accommodative monetary policy. If inflation is a problem, the Fed is limited in providing economic stimulus.

By tracking the jobs data, investors can sense the degree of tightness in the job market. If wage inflation threatens, it's a good bet that interest rates will rise; bond and stock prices will fall. No doubt that the only investors in a good mood will be the ones who watched the employment report and adjusted their portfolios to anticipate these events. In contrast, when job growth is slow or negative, then interest rates are likely to decline - boosting up bond and stock prices in the process.

The employment situation is the primary monthly indicator of aggregate economic activity because it encompasses all major sectors of the economy. It is comprehensive and available early in the month. Many other economic indicators are dependent upon its information. It not only reveals information about the labor market, but about income and production as well. In short, it provides clues about other economic indicators reported for the month and plays a big role in influencing financial market psychology during the month. Additionally, the Fed has made 6.5 percent unemployment a threshold for considering changes in policy - both for quantitative easing and the fed funds rate. And the Fed has emphasized that it is overall labor market conditions that matter - not just a specific number.

The bond market will rally (fall) when the employment situation shows weakness (strength). The equity market often rallies with the bond market on weak data because low interest rates are good for stocks. But sometimes the two markets move in opposite directions. After all, a healthy labor market should be favorable for the stock market because it supports economic growth and corporate profits. At the same time, bond traders are more concerned about the potential for inflationary pressures.

The unemployment rate rises during cyclical downturns and falls during periods of rapid economic growth. A rising unemployment rate is associated with a weak or contracting economy and declining interest rates. Conversely, a decreasing unemployment rate is associated with an expanding economy and potentially rising interest rates. The fear is that wages will accelerate if the unemployment rate becomes too low and workers are hard to find.

Nonfarm payroll employment indicates the current level of economic activity. Increases in nonfarm payrolls translate into earnings that workers will spend on goods and services in the economy. The greater the increase in employment, the faster is the total economic growth. When the economy is in the mature phase of an expansion, rapid increases in employment cause fears of inflationary pressures if rapid demand for goods and services cannot be met by current production.

When the average workweek trends up, it supports production gains in the current period and portends additional employment increases. When the average workweek is in a declining mode, it probably is signaling a potential slowdown in employment growth-or even outright declines in employment in case of recession.

Gains in average hourly earnings represent wage pressures. It is worth noting that these figures aren't adjusted for overtime pay or shifts in the composition of the workforce, which affects wages on its own. Market participants believe that a rising trend in hourly earnings will lead to higher inflation. But if increased wages are matched by productivity gains, producers likely will not increase product prices with wages because their unit labor costs are stable.