Jobs Report Blows Out Expectations, Sets Up Chance for Another Rate Increase

The May jobs report is like a slap across the face by someone defiant. Nonfarm employment increased by 339,000 in May when the Dow Jones poll of economists came up with 190,000. The added jobs are in line with the average monthly gain of 341,000 over the last 12 months. And that’s before another 93,000 added in revisions to March and April.

At the same time, unemployment rose 30 basis points to 3.7% and the number of unemployed people rose by 440,000 to 6.1 million. Of those, 318,000 were people who had lost jobs or completed temporary jobs.

The biggest increases were in professional and business services, government employment, healthcare, leisure and hospitality, construction, transportation and warehousing, and social assistance.

“The most resilient sectors include leisure and hospitality, as consumers are indulging in summer travel and eating out, creating hiring demand,” said Becky Frankiewicz, president and chief commercial officer of ManpowerGroup, in an emailed statement. “Retail shows hiring confidence as well – with demand for more supervisors up according to our real-time data. Fatigue is setting in for tech companies and larger enterprises across the board. Our data shows cooling in IT, with posted roles down 12% compared to last month. Yet those let go are being quickly reabsorbed, often into midsize companies.”

Average hourly earnings in May were up 0.3%, or 4.3% over the last 12 months. That is still above the 2% inflation rate the Federal Reserve has targeted, and it pays close attention to labor costs.

The Fed’s Federal Open Market Committee meets later this month to discuss whether to pause rate hikes, given the impact increased interest rates have had on the value of banks’ long-term bond holdings, or to add another 0.25 percentage points to the current benchmark rate.

It had been a growing assumption among Fed watchers that it would likely pause additional hikes, given public statements by various members. That is no longer so certain, with May inflation numbers next in line as an influence on the ultimate decision.

“We think job growth needs to fall below 150,000 per month in order to satisfy the Federal Reserve that the labor market is responding to higher interest rates, thereby aiding in the reduction of inflation,” Carlos Vaz, CEO CONTI Capital, said in an emailed statement. “In our view, it’s unlikely that the Fed will proceed with an additional interest rate hike at the forthcoming FOMC meeting, but the odds of any near-term pivot to interest rate cuts are very low based on the latest employment reading.”

Complicating any decision is the Senate’s passing of the debt ceiling extension bill, which President Biden has said he will sign, possibly as early as Monday. While putting off a default was a necessary move, the timing means the Treasury will have to issue a massive amount of bonds in a short amount of time, draining liquidity from markets and driving up interest rates. Bank of America has estimated that this could be the equivalent of a quarter percent interest rate hike.