US Economy Adds 272,000 New Jobs, Unemployment Ticks Up to 4 Percent in May

A “Help Wanted” sign hangs in restaurant window in Medford, Mass., on Jan. 25, 2023. Brian Snyder/Reuters

The U.S. economy created 272,000 new jobs in May, topping economists’ estimates and defying observations that the labor market could be cooling off. The latest figure could further challenge investor expectations that the Federal Reserve might pull the trigger on an early rate cut.

The latest reading was up from the April gain of 165,000 jobs, according to the Bureau of Labor Statistics (BLS). It topped the consensus forecast of 185,000.

Last month, the unemployment rate ticked up to 4 percent, up from 3.9 percent. This was higher than the market projection of 3.9 percent.

Average hourly earnings rose at a higher-than-expected monthly clip of 0.4 percent and edged up to 4.1 percent year-over-year.

The labor force participation rate edged down from 62.7 percent to 62.5 percent. Average weekly hours were unchanged at 34.3, in line with market expectations.

A considerable share of the employment gains were concentrated in health care (68,000), government (43,000), and leisure and hospitality (35,000).

Manufacturing payrolls rose at a smaller-than-expected 8,000, up from a downwardly revised 6,000.

The divergence between full-time and part-time employment. Full-time jobs lost 625,000, while part-time jobs increased by 286,000.

The number of people working two or more jobs climbed to 8.399 million.

Additionally, 414,000 foreign-born workers (legal and illegal) gained employment, and 663,000 native-born workers lost their jobs.

The gap between the establishment and household surveys was wide. The former factors in every job a household member has and the latter avoids duplication. Although the establishment highlighted 272,000 new jobs, the household component reported 408,000 lost jobs.

While not as substantial as in previous months, the labor statistics agency reported revisions. The March figure was adjusted down by 5,000 to 310,000. Last month’s final reading was revised down by 10,000 to 165,000.

What does the latest jobs report signal? A slowing economy with above-trend inflation, says Bryce Doty, the senior vice president and senior portfolio manager at Sit Investment Associates.

“Our economic view is that cost push inflation is pressuring consumers budget and driving more people to get jobs and help reduce the enormous number of job openings,” he said. “The rising unemployment combined with an uptick in wages will make some fear stagflation, but it’s more like a slowing economy with inflation in the 3% range.”

Market Reaction

The financial markets turned negative in pre-market trading following the jobs data, with the leading benchmark indexes down as much as 0.4 percent.

U.S. Treasury yields were submerged in an ocean of green. The benchmark 10-year yield topped 4.41 percent. The 2-year yield touched 4.86 percent, while the 30-year bond surpassed 4.54 percent.

The U.S. Dollar Index (DXY), a measurement of the greenback against a basket of currencies, rocketed after the employment figures. The DXY surged as much as 0.51 percent to 104.63.

Investors are worried that this “blockbuster” report would make it more difficult for the Federal Reserve to cut interest rates.

“This blockbuster NFP [non-farm payrolls] makes it harder for the Fed to move towards a cut in rates,” said Giuseppe Sette, the president of Toggle AI, a financial market research firm. “The next few months will be interesting as the Fed will have to tussle with the the stronger performance of the US economy, limiting its ability to follow the example of the ECB and cut.”

‘Coming Into Better Balance’

The U.S. labor market is “coming into better balance,” says Mark Hamrick, a senior economic analyst at Bankrate.

“The release of the JOLTS [Job Openings and Labor Turnover Summary] data is the first in a critically important series of snapshots telling us where the job market stands,” Mr. Hamrick said. “As it normalizes after the volatility and disruption associated with the pandemic, the supply and demand of labor is coming into better balance.”

Earlier this week, the federal agency reported that the number of job openings declined by 296,000 in April to 8.059 million, the lowest level in more than three years.

Since peaking at 12.2 million job openings in March 2022, employment vacancies have been steadily falling.

“The number and rate of so-called quits (people quitting their jobs) are also moderating, reflecting normalization of the job market,” he added.

Job quits rose by 98,000 to 3.507 million while the quit rate held steady at 2.2 percent.

Indeed, a treasure trove of employment statistics suggests that the U.S. labor arena is slowing.

According to the ADP National Employment Report, private businesses added 152,000 fewer than expected in May, down from 188,000 in April.

Initial jobless claims edged up to 229,000 for the week ending June 1, slightly higher than the market forecast of 220,000. Continuing jobless claims rose to 1.792 million.

However, layoffs have not accelerated as U.S.-based employers announced plans to cut 63,816 jobs in May, down 1.5 percent from April. This was also down a little more than 20 percent compared to a year ago.

Moreover, on a year-to-date basis, layoffs have totaled nearly 386,000, down 7.6 percent compared to the same January to May span of 2023.

Implications for the Fed

Federal Reserve officials have insisted they can be patient before cutting interest rates. With a largely intact labor market and a persistently growing economic landscape, the central bank is waiting for several months of positive inflation data before pivoting on monetary policy.

Next week’s consumer price index (CPI) report could support or erode the case of an earlier rate cut. For now, investors are penciling in a rate cut at the September meeting, according to the CME FedWatch Tool.

The Cleveland Fed’s Inflation Nowcasting model anticipates the annual inflation rate will hold steady at 3.4 percent.

The next two-day Federal Open Market Committee (FOMC) policy meeting will be on June 11 and 12.

In addition to the policy announcement, the Fed will also release the updated Summary of Economic Projections, which could offer insight as to how many times monetary authorities think the central bank will cut rates.

In the March data, officials kept their forecast of three rate cuts intact. However, with inflation progress stalling, some policymakers, including Cleveland Fed president Loretta Mester, have considered revising their outlooks.