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Employment Report (May)

Payroll gains remain strong, as wage growth eases

  • The better than anticipated 390,000 gain in non-farm payrolls adds to the signs that the economy is still strong while, amid a rebound in the labour force, wage growth is beginning to moderate. With wage growth still running well above rates that are consistent with the Fed’s 2% inflation target, however, that won’t stop the Fed from continuing to raise rates by 50bp at the next meeting or two.
  • The strength of payrolls in May was widespread, with solid gains in professional & business services employment (+75,000), leisure & hospitality (+84,000), construction (+36,000) and manufacturing (+18,000). The one weak spot was retail, where employment fell by 61,000. Those losses were concentrated in general merchandise stores, reflecting the recent struggles at Walmart and Target. This could just be noise, however, with modest job losses in building materials and clothing stores too, even though firms like Home Depot recently reported very upbeat earnings. More broadly, retail employment is still up by close to 440,000 over the past year.
  • The household survey showed a similarly strong 321,000 rise in employment although, with the labour force rising by 330,000, the unemployment rate was unchanged at 3.6%. The rebound in labour supply is still mostly concentrated among prime-aged workers, with the participation rate for 25 to 54-year-olds rising to 82.6%, 0.5%-pts below of its pre-pandemic rate, while the rate for those aged 55 and older remains 1.4% below the February 2020 level.
  • Amid signs that labour shortages are easing, average hourly earnings rose by a relatively muted (at least by recent standards) 0.3% in May for a second month running, bringing the annual rate down to 5.2% from 5.5%. Surveys of firms’ compensation plans suggest that is the beginning of a gradual deceleration in wage growth coming over the rest of the year. (See Chart 1.) The deceleration in wage growth is encouraging because it suggests that the broader cyclical price pressures in the economy are close to peaking. But it will take a slowdown in annual wage growth to closer to 4% before the Fed can claim it is making significant progress towards its inflation goal.

Chart 1: NFIB Compensation Plans & Average Hourly Earnings

chart001-40.png

Sources: Refinitiv, NFIB

Table: Labour Market Data

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Mar

Apr

May

Non-Farm Payrolls (000s)

557

689

517

424

677

647

588

504

714

398

436

390

Unemployment Rate (%)

5.9

5.4

5.2

4.7

4.6

4.2

3.9

4.0

3.8

3.6

3.6

3.6

Ave H’rly Earnings (%m/m)

0.5

0.5

0.3

0.5

0.6

0.4

0.5

0.6

0.1

0.5

0.3

0.3

Ave Hourly Earnings (%y/y)

4.0

4.3

4.3

4.8

5.4

5.3

4.9

5.4

5.2

5.6

5.5

5.2

Ave Weekly Hours Worked

34.8

34.8

34.7

34.8

34.8

34.8

34.8

34.6

34.7

34.6

34.6

34.6

Source: Refinitiv