May Job Growth Bounces Back After April Slowdown

U.S. employers added 272,000 new jobs in May, much more than expected, according to the latest employment report from the U.S. Bureau of Labor Statistics. The monthly jobs tally sparks some uncertainty around what was widely considered a cooling labor market and will likely undermine the case for cutting interest rates in the near term.

Despite the new jobs being created, the unemployment rate ticked up to 4 percent. Unemployment had stayed under 4 percent for the last 28 months, the longest streak in over 70 years. Average hourly earnings rose 0.4 percent on the month and were up 4.1 percent from a year ago.

“Payroll gains were not only large, but also widespread,” said Nick Bunker, economic research director for North America for the Indeed Hiring Lab. “But while there is still a lot of strength in the labor market, its ability to continue to deliver robust gains at these levels will likely be challenged going forward as job openings continue to fall and the economy continues to cool.”

Bunker added that the rise in the unemployment rate shouldn’t be a cause for concern. “The rise in unemployment can almost entirely be chalked up to workers 24 and under, while prime-age employment rose,” he said.

SHRM Senior Economist Justin Ladner said that the labor market data from April provided notable evidence of labor market loosening, but that “the unexpectedly strong employment growth and robust wage growth reported for May runs counter to this narrative and suggests that we will need more data to understand whether and to what extent the labor market is loosening.”

Tuan Nguyen, an economist at RSM US, agreed that it is hard to square the latest data with other recent economic indicators that have pointed to a cooling economy and suggested that one explanation could be an increase in seasonal jobs.

“The stronger than expected jobs numbers point to continued resilience of the U.S. labor market as we recalibrate post-pandemic,” said Becky Frankiewicz, president and chief commercial officer of ManpowerGroup North America. “We’re seeing a ‘steady as they go’ job market where demand remains strong but softening in some sectors,” she said. “There are 8.1 million job openings, but job postings are down. Pay gains are also stabilizing, approaching pre-pandemic levels. This post-pandemic rebalancing is likely to continue throughout the year.”

The employment report for May will reinforce the Federal Reserve’s cautious approach toward cutting interest rates, Ladner said. “In particular, the above-expectations wage growth rate underscores concern about persistent inflation. In the absence of other evidence, the Fed will likely interpret this jobs report as a reason to continue its current course of action.”

More likely than not, a July rate cut is out of the picture, while the odds for September are lower now, Nguyen agreed.

Industry Breakdown

Employment gains in May were concentrated in health care, government, and leisure and hospitality, together accounting for more than half the overall gains.

“Health care continues to be the powerhouse of the labor market, adding 68,000 new jobs,” said Sam Kuhn, an economist at Appcast. “Leisure and hospitality also continued to trend upward, adding 42,000 new jobs.”

Amy Glaser, senior vice president at Adecco noted that “As the health care sector continues to have high demand for talent, some employers are loosening requirements and offering more training to meet those needs. And as we approach summer, much of the hospitality and leisure industry is staffing up to meet increased demand—and the influx of workers who are now out of school and available to work is helping.”

Other sectors reported solid growth as well, including the public sector (43,000 new jobs) professional and business services (32,000) and retail (13,000).

Interest rate-sensitive sectors, including construction and manufacturing, are still adding jobs, Bunker said.

“While tech hiring isn’t as robust as it used to be, demand remains strong,” Frankiewicz said. “Software developers and IT generalists are the most in-demand roles in the U.S. today, right behind registered nurses.”

She added that in-store retail and drivers are also in high demand and value-based retailers such as Walgreens and Lowe’s rank highly as top employers.

Unemployment Hits 4 Percent

The unemployment rate edged up from April’s 3.9 percent, hitting 4 percent for the first time in more than two years. A more encompassing unemployment figure that includes discouraged workers and those holding part-time jobs for economic reasons held steady at 7.4 percent.

The report also showed that full-time workers declined by 625,000, while those holding part-time positions increased by 286,000.

“The labor supply was weaker in May with the labor force participation rate falling to 62.5 percent from 62.7 percent,” Nguyen said. “But most of the drop came from 55-or-older workers. The prime-age group participation rate continued to go strong, up to 83.6 percent, the highest since 2002.”

Julia Pollak, chief economist at ZipRecruiter, pointed out that although the employment-to-population ratio for prime-age workers (those aged 25 to 54) held steady, and reached a new all-time high for women, other measures were weaker. “The employment-to-population ratio for young workers—which had been steadily increasing earlier in the year—dropped. That decline could be a sign of a more challenging summer hiring season for teens and new grads,” she said.

Wages

Despite recent stubborn inflation, wage growth continued to moderate for the past several months, Kuhn said. The slight increase in average hourly earnings in May is important to watch “as this could be a potential warning sign to the Federal Reserve of a wage-price spiral, where higher inflation begets higher wage growth,” he said. 

Pollak added that the higher wage growth is a byproduct of stronger demand for workers.