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The monthly job report was a mixed bag and only makes the next rate decision more difficult for the Federal Reserve. According to the Labor Department, the U.S. added 339,000 jobs in May, the biggest gain since January and much more than the estimated 195,000 gain. Job growth for April was revised higher by 41,000. This data alone points to a strong labor market that doesn’t seem phased by 500 basis points of rate hikes and gives the Fed ammunition to raise rates again in June. On the other hand, the unemployment rate jumped from 3.4% to 3.7%, the highest level since October 2022. Wage gains fell both monthly and annually. These two pieces of information suggest the rate hikes are working and will allow the Fed to pause this month.
The Fed will likely delve into the details of the report to understand what is happening in the labor market. For instance, the service producing sector continues to gain most of the job growth, as the economy continues to shift from goods to services as a result of the pandemic recovery. Service-related companies added 257,000 jobs, compared to 26,000 jobs in goods producing companies. Government jobs rounded out the gains with 56,000 jobs. Wage gains are slowing due to more lower paying jobs being added as part of the dynamic shift to service jobs. As for the increase in the unemployment rate, the household survey reflected 130,000 more people entering the labor force, along with 310,000 losing their jobs. This comes to a total of 440,000 additional people out of work. It is difficult to merge the two sources of job data, but the Fed will likely consider the increase in out of work people as proof its strategy is working.
Key Indicators this Week
Manufacturing – The ISM manufacturing index fell to 46.9 in May, making it the seventh straight month in contraction territory and the longest stretch of readings below 50 since 2009. The slowdown in manufacturing activity comes from continued falling demand for goods as consumers shift to experiential activities and businesses focus on lowering inventory to match weak demand. The sub-index of new orders fell three points to 42.6, the second weakest reading in three years. Fourteen industries reported slower activity, led by wood products, primary metals and apparel. The one bright spot in the index was a nine point decline in prices paid, the largest drop in 10 months. The decline is a result of falling energy, metals and crop prices due to weakening global demand. Employment increased to the highest level since August, which led to a boost in productivity. The ratio of optimistic to pessimistic comments in the survey remained at 1-to-1, pointing to wide discrepancies across industries in the economic outlook. This is the real takeaway of the ISM gauge, as I see it, and clearly shows how uncertain the outlook is. Some respondents, such as those in computer and electronic products, indicated business is mixed, while those in chemical products saw a gain in momentum and still others, including those in transportation equipment, saw new orders slowing.
Confidence – In May, consumer confidence fell to the lowest level in six months and is well below pre-pandemic levels. There is growing concern about the labor market and the outlook for business conditions. The percentage of respondents answering the Conference Board’s survey who said jobs were “plentiful” fell to the lowest level in more than two years, and those expecting more opportunities in the coming months fell to the lowest level since 2016. Consumers are aware that a weaker economy will lower demand for workers. At the same time, plans to make large purchases such as cars, homes or appliances increased.
Sarina Freedland – Senior Investment Officer
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