Strong Non-Farm Payrolls Data Surprises
A review of the U.S. Labor Market
The U.S. Bureau of Labor Statistics recently reported a surprising increase in total non-farm payroll employment by 339,000 in May 2023. This follows strong Job Openings and Labor Turnover Survey (JOLTS) and Automatic Data Processing (ADP) data, indicating a robust labor market. However, this strength in the labor market could potentially undermine the Federal Reserve's fight against inflation.
Breakdown by Industry and Region
The job gains were concentrated in the services industry, and spread across various sectors, including professional and business services, government, health care, construction, transportation and warehousing, and social assistance.
Professional and business services added 64,000 jobs, continuing the trend from April. This sector includes professional, scientific, and technical services, which added 43,000 jobs in May. These are generally higher paying “white collar” jobs.
Government employment increased by 56,000, slightly above the average monthly gain of 42,000 over the prior 12 months. However, it's important to note that employment in government is still below its pre-pandemic February 2020 level by 209,000, or 0.9 percent.
Health care added 52,000 jobs, similar to the average monthly gain of 50,000 over the prior 12 months. Job growth occurred in ambulatory health care services (+24,000), hospitals (+20,000), and nursing and residential care facilities (+9,000). The healthcare sector is likely to continue to enjoy healthy growth as healthcare needs rise with so much deferred care and an aging population.
Leisure and hospitality continued to trend up in May (+48,000), largely in food services and drinking places (+33,000). However, employment in this industry remains below its February 2020 level by 349,000, or 2.1 percent. It’s fair to say that the industry is still playing catch-up after COVID.
Construction added 25,000 jobs, including 11,000 jobs in heavy and civil engineering construction. Over the prior 12 months, construction had added an average of 17,000 jobs per month. The strength here is somewhat surprising as we see construction activity slowing.
Transportation and warehousing increased by 24,000 in May. Transit and ground passenger transportation added 12,000 jobs, offsetting a decrease in the prior month. Employment also increased in couriers and messengers (+8,000) and air transportation (+3,000). This sector has been quite volatile with terminations and hirings based on the whims of the econmy.
Social assistance rose by 22,000, in line with the average monthly gain of 23,000 over the prior 12 months. Over the month, individual and family services added 17,000 jobs.
Employment was little changed over the month in other major industries, including mining, quarrying, and oil and gas extraction; manufacturing; wholesale trade; retail trade; information; financial activities; and other services.
Implications for the Federal Reserve's Fight Against Inflation
The strong labor market data presents a continuing challenge for the Federal Reserve's fight against inflation. The robust labor market has led to wage inflation as employers increase salaries to attract and retain workers, particularly in the services industry.
In May, average hourly earnings for all employees on private non-farm payrolls rose by 11 cents, or 0.3 percent, to $33.44. Over the past 12 months, average hourly earnings have increased by 4.3 percent. This wage inflation has, in turn, lead to price inflation as businesses pass on higher labor costs to consumers. A phenomenon we continue to see in the services industry.
Unemployment came in higher at 3.7%, but still close to historic lows.
In conclusion, the strong non-farm payrolls data, along with the JOLTS and ADP data, paints a picture of a robust U.S. labor market. However, this strength also brings challenges for inflation management. We feel that the Federal Reserve will be likely to hike at least once more, possibly in July, before they pause for a longer period.