Friday, June 14, 2024

U.S. Adds Whopping 272,000 Jobs: Here’s Why That’s Bad News For Interest Rates

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The labor market grew at a faster pace than anticipated in May, according to the Labor Department’s monthly jobs report released Friday morning, unwelcome news for investors who had hoped for a weak report to support hopes for a lowering of U.S. interest rates.

Key Facts

Non-farm U.S. payrolls expanded by 272,000 from April to May on a seasonally adjusted basis, smashing consensus economist estimates of 180,000, according to FactSet data.

The unemployment rate was 4% in May, coming in above projections of 3.9%, where it stood in April, and up from May 2023’s 3.7%.

Average hourly wages rose to a record $34.91, 0.4% higher than they were in April and 4.1% above where they were a year ago.

The government reported the strongest month-over-month job growth in the healthcare, hospitality and government sectors.

Equity and bond markets digested the report negatively as investors in both asset classes looked for weak employment data to justify much awaited interest rate cuts, with the S&P 500 falling slightly and 2-year and 10-year government bond yields soaring about 15 basis points apiece (yields move inversely to bond prices).

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The dissonance posed by simultaneously better-than-expected numbers for job growth and unemployment is due to differing inputs, as labor force changes are measured by the government’s survey of employers and unemployment is compiled by polls of households.

Crucial Quote

“The May jobs report sent conflicting messages,” Comerica’s chief economist Bill Adams wrote in emailed comments. The employment update is a “Rorschach blot” for optimists who focused on the strong labor force and pay growth, while pessimists honed in on the rising unemployment and the increasing proportion of part-time laborers.

Key Background

Earlier in the week, several private firms released less comprehensive jobs reports that indicated weakness in the job market. Payroll processor ADP reported Wednesday far weaker May job growth than economist forecasts, while job placement consultant Challenger, Gray & Christmas said Thursday public announcements for new hires over 2024’s first five months were their weakest since 2012. Unemployment is above its 54-year low of 3.4% set early last year, but remains well within the historic boundary for non-recessionary periods. The modest uptick in unemployment came as inflation fell precipitously from its 2022 surge, as unemployment and inflation move in opposite directions. The milder labor market expansion may be bad news for job seekers, but the stock market has reacted positively to the moderation, as cool job growth means the Federal Reserve is more likely to lower interest rates to jolt the economy, a move which would also boost public companies’ valuations.

Further Reading

ForbesU.S. Employers Have Planned 50,000 Hires So Far This Year-The Lowest Number Since 2014ForbesNo, We’re Not In A Recession-But Here’s Why Many Americans Feel Like We Are

Correction (6/7): The headline has been updated with the correct number of jobs added in the U.S. last month.

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