The May 2024 employment numbers released by the Labor Department have shown surprising strength in the labor market, with payrolls growing by 272,000 positions. This is well above the economist’s consensus expectation of 180,000 and last month’s level of 165,000. The growth was observed across most sectors, including health care, government, leisure and hospitality, and professional services. However, the strong job market may be more than the Federal Reserve wants to see.
Wage growth, which had been tame for much of 2024, experienced a 4.8% annualized rate increase with a 14-cent raise. This is a significant jump from previous months and could potentially be inflationary if productivity growth does not remain strong. Despite this, productivity dipped in the first quarter of the year, raising concerns about the sustainability of the wage growth.
On the household side, the unemployment rate rose to 4% for the first time since early 2022. However, this was partially due to about 250,000 people dropping out of the labor force, reducing the participation rate to 62.5%. A shrinking labor force contributes to labor market tightness as there are fewer workers available to fill the increasing number of job vacancies.
The strong job market numbers can be viewed from two different perspectives. Those concerned about a slowing economy or recession will be encouraged by the labor market’s renewed strength. On the other hand, individuals worried about inflation and hoping for Federal Reserve interest rate cuts may be disappointed as the strong numbers make any imminent rate cut less likely. This is significant considering the job vacancy rate for April was 4.8%, the first reading below 5% in over three years.
While caution should be exercised in interpreting one month’s numbers, the three-month average payroll growth now stands at nearly 250,000, suggesting a strong and steady labor market. Recent measures have shown inflation between 3% and 4%, well above the Fed’s target of 2%, indicating that the Fed is unlikely to move towards interest rate cuts in the near future. Policymakers are expected to wait for stronger evidence of a slowing and less inflation-prone economy before making any significant changes.
