Friday, June 2, 2023
- Company payrolls grew by 339,000 in May as April estimates were revised higher to 294,000.
- Job gains were broad-based and occurred in professional and business services, health care, construction, and social assistance services.
- The unemployment rate increased by 0.3 percentage points to 3.7%, the highest rate since October.
- Both measures of participation were roughly unchanged, but there were 440,000 more people out of a job, the biggest monthly rise since the beginning of the pandemic.
- Wages grew 4.3% from a year ago, a healthy clip but not high enough to incite additional inflationary pressures.
Bottom Line: The Federal Reserve (Fed) will still likely pause later this month, despite today’s payroll report, because policy makers are focused on the lagged effects of the previous rate hikes.
Who Do You Believe?
Job gains in May were incredibly strong, adding uncertainty to the future path of interest rates. The establishment survey, which tracks changes in company payrolls, showed that firms added 339,000 jobs in May. But, the household survey, which shows the number of working individuals, showed a net decline in 310,000 employed people. This divergence is not necessarily a problem but it highlights the fact that during times of transition, some metrics reveal a different story than others.
But what about the rise in layoffs? Layoffs for most of this year were from business cost-cutting initiatives and streamlining balance sheets in advance of the coming slowdown. So, if we do slide into recession, firms appear well-prepared for potentially slowing top-line trends. In this case, capital markets may not react as negatively as they have historically during recession
Productivity Gains Could Help Long-Run Inflationary Path
We think inflation will continue to come down throughout the year, but inflation may not reach the Fed’s 2% target until much later. As investors develop expectations on rates and earnings for 2024, we think it’s important to watch the path for productivity growth. One important metric for productivity is employment dynamics for the prime age worker (those between the ages of 25 and 54). The ratio of employment to the population for prime age workers is slightly above pre-pandemic levels and as long as the prime age worker is willing and able to work, we think the economy may have strong enough productivity growth to put a damper on inflation pressures going forward. The so-called fourth industrial revolution (automation/machine learning) could power us past the risk of persistently high inflation.
The Fed is in a tough spot. The job market was hot in May, but some suggest the labor market is not the primary source of current inflationary pressures. As the San Francisco Fed indicated, labor costs do not have a meaningful impact on sticky inflation. The Fed will still likely pause later this month, despite today’s payroll report, because policy makers are focused on the lagged effects of the previous rate hikes. Most voting members of the Federal Open Market Committee (FOMC) do not believe the economy has felt the full impact of tighter financial conditions. If they pause this month, there is a growing expectation the Committee will hike in July if the economy continues to run hotter than expected. Despite the growing uncertainties, the LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) is growing increasingly positive on core bonds, which offer a more competitive alternative to equities than they have in quite some time.
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