The May Employment Report was a disappointment relative to yesterday's ADP Estimate, but essentially in line with the evidence discussed in my prior blog -- the ADP Estimate was more of a surprise than this Report. The Report is consistent with the Fed's expectation of above-trend GDP Growth and further labor market improvement, but it also keeps alive the Fed's budding concern about low inflation. The real-side part of the report is strong enough to ensure a Fed rate hike at the June 13-14 FOMC Meeting, but the absence of wage inflation evidence leaves open the door for skipping a rate hike in September. The Report should be a positive for stocks and longer-term Treasuries, but a negative for the dollar.
The +138k m/m increase in Payrolls, after large downward revisions to +174k from +211k in April and to +50k from +79k in March, is consistent with my earlier expectation that job growth would moderate after one-off factors boosted it in January-February. In contrast, GDP Growth should speed up in Q217 after one-off factors held it down in Q117. Abstracting from this volatility points to an underlying 1.5-2.5% pace for Real GDP Growth -- enough to keep the Unemployment Rate in a downtrend.
While the May Payroll increase was far less than +253k ADP Estimate and somewhat less than the +173k consensus, the gain was still above the 75-125k pace viewed to be consistent with a steady Unemployment Rate. And, the latter indeed fell to 4.3% from 4.4%.
There is still no evidence that the lower Unemployment Rate is leading to a speedup in wage inflation. The 0.2% m/m increase in Average Hourly Earnings was a "low" 0.2%, as it rounded up from a modest 0.15%. The y/y was steady at 2.5% (2.46% unrounded). To be sure, calendar considerations work toward a higher print in June, closer to 0.3% m/m that could push the y/y up to 2.6% -- but this y/y pace is still below last year's 2.9% pace.
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