Usually the monthly employment report is a mix of strong and weak indicators, as there can be a fair amount of random noise in the monthly statistics. The May data release was a rare case when practically everything pointed unambiguously toward strength.
Payroll employment registered a robust 223,000 gain, well ahead of expectations, on top of a small upward revision to prior months. More importantly, the jobs gain came across virtually every sector of the economy. The only industry that posted a clearly unsustainable rise was retail, which added 31,000 jobs.
{mosads}Otherwise, the impressive overall advance was generated by unspectacular increases across virtually every part of the economy (the only noteworthy category to post a decline was temp agency employees, which is probably yet another confirmation of tightness in labor markets, as firms are converting their temp workers to permanent positions so as not to risk losing them).
Wages posted a larger-than-projected 0.3-percent monthly increase in May. The year-over-year advance accelerated to 2.7 percent last month, just off the best readings of this expansion.
Interestingly, the narrower wage measure that only includes “production and nonsupervisory workers” has accelerated in recent months and is now rising faster than the broader gauge of pay, a reversal from the prevailing relationship between the two wage metrics in recent years.
This suggests that the pickup in wage offerings this year is occurring mainly for hourly workers rather than salaried employees and executives, further evidence that the strength of the labor market has filtered down and is no longer only seen in worker shortages for isolated high-skilled specialties.
Finally, the unemployment rate dropped for a second month in a row in May, reaching 3.75 percent (it rounded up to 3.8 percent, but only barely) for the first time since 1969. After holding at 4.1 percent for six straight months, the jobless rate has plunged from 4.1 percent to 3.8 percent over the past two months, lurching past the 2000 low.
Moreover, the underlying details were favorable, as the household survey measure of employment surged in May by 293,000, while the labor force was essentially unchanged (up by a mere 12,000). So far in 2018, both gauges of job growth are running on average well above 200,000 per month, an acceleration from the past two months, a puzzle given how hard firms report that it has become to find qualified workers.
Today’s employment data, coupled with news that construction spending rebounded sharply in April as the winter finally let up and Thursday’s report that consumer spending was stronger than expected in April, suggest that the economy is gathering steam.
This is not an altogether surprising development, as activity had already accelerated in 2017 and the recently-passed tax cuts should add further fuel to the fire this year and next.
While political upheaval in Italy and Spain as well as the threat of tariffs raise uncertainties about the global economic picture, the domestic economy is rolling.
The Fed is poised to hike rates again in two weeks, but the “gradual” rate hikes seen by the Federal Open Market Committee over the past 18 months have apparently not been enough to cool down an economy that recently appears to be gathering strength.
Stephen Stanley is the chief economist for Amherst Pierpont Securities, a broker-dealer providing institutional and middle-market clients with access to fixed-income products. He is a regular guest on Bloomberg and CNBC and is frequently quoted in The Wall Street Journal on economic and financial issues.