Strong US Payrolls And Wage Growth Push Back Bets For Fed Cuts

(Bloomberg) -- US job growth surged in May and wages accelerated, prompting traders to push back the expected timing of Federal Reserve interest-rate cuts.

Nonfarm payrolls advanced 272,000 last month, a Bureau of Labor Statistics report showed Friday, beating all projections in a Bloomberg survey of economists. Average hourly earnings climbed 0.4% from April and 4.1% from a year ago, both picking up from the prior report.

However, the unemployment rate — which is derived from a separate survey — increased to 4% from 3.9%, rising to that level for the first time in over two years.

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The latest figures highlight a labor market that continues to defy expectations and blunt the impact on the economy from high interest rates and prices. That strength risks keeping inflationary pressures stubborn, which will likely reinforce the Fed’s cautious stance on monetary policy as officials debate just how restrictive rates are.

“It’s a very Fed-unfriendly report – an easing-unfriendly report,” said Jay Bryson, Wells Fargo & Co. chief economist. “Taking this piece of data by itself means the Fed is likely to remain on hold for the next several months.”

This is one of the last major reports Fed officials will see before next week’s meeting, when they’re widely forecast to keep borrowing costs at a two-decade high. A closely watched inflation report will be released on the morning of their Wednesday decision.

Economists will be especially attuned to updated quarterly projections after inflation and employment mostly surprised to the upside at the start of the year. Officials aren’t expected to cut rates until the end of 2024 at the earliest, even as their Group of Seven peers in Europe and Canada did so this week.

The S&P 500 opened lower, Treasuries sold off and the dollar strengthened after the release. Traders trimmed bets on how much the Fed will cut rates this year, dialing back expectations from earlier in the week as recent data on manufacturing and job openings came in softer than anticipated.

What Bloomberg Economics Says...

“The Fed, which appears to have underplayed the measurement issues plaguing the establishment survey, likely will be more influenced by the strength in nonfarm payrolls. That increases the risk that, down the line, Fed Chair Jerome Powell will be confronted with the sort of “unexpected” labor-market weakness that he said could precipitate rate cuts.”

— Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou

To read the full note, click here

The jobs report is composed of two surveys: one of businesses that generates the payrolls and wage data, and another smaller one of households used to produce the unemployment rate.

The household survey also publishes its own measure of employment, which dropped by more than 400,000 in May, the largest decline this year. This metric has increasingly been at odds with the headline payrolls figure, sparking debate among economists as to which is the truer signal of the labor market.

The pickup in unemployment mostly reflected people returning to the labor force and not finding work. The number of people who lost or left their jobs both fell.

President Joe Biden has routinely touted the strength of the labor market in his campaign for reelection, noting how the unemployment rate had held below 4% for over two years. The unexpected rise represents another hurdle for his administration as voters have largely been downbeat on the economy and burdened by persistent inflation.

“We have historic job growth, low levels of unemployment,” Julie Su, acting labor secretary, said on Bloomberg Television. “I think it is the very definition of a soft landing.”

The participation rate — the share of the population that is working or looking for work — fell to 62.5%, matching the lowest since early last year. The rate for workers ages 25-54, however, rose to the highest since 2002.

Job growth in May was fairly broad, led by health care, government and leisure and hospitality. Professional and business services added the most jobs since the start of the year.

Data out Wednesday from the BLS suggested payrolls might have grown at a much slower monthly pace on average last year than initially reported. The Quarterly Census of Employment and Wages covers more than 95% of US jobs, and are eventually used in annual revisions to the monthly data.

In Friday’s report, aggregate weekly payrolls — a broad measure of employment, hours and earnings — advanced 0.6% after stalling in April. Wage growth for production and nonsupervisory employees, which covers the majority of workers, was also robust — up 0.47% from a month earlier, the most since March of last year.

(Adds chart of payrolls by industry)

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