Mixed Signals in May Jobs Report: Employment Growth with Rising Unemployment Rate
Economics news and commentary for June 2, 2023
US Employment Situation
Today’s May jobs report provided a mixed picture of the US labor market. While the economy added a substantial number of jobs according to the Establishment Survey, the unemployment rate experienced an unexpected increase as a result of an employment loss in the Household Survey. According to the headline, the US economy added a strong 339,000 jobs in May. However, despite the job gains, the unemployment rate saw an unexpected uptick of 0.3 ppts, reaching 3.7%. This counterintuitive phenomenon can be attributed to a reported decline of -330,000 in employment, as revealed by the data in the Household Survey.
Also in that data, it was reported that the number of unemployed individuals surged by 440,000, reaching a total of 6.1 million. This increase in unemployment, coupled with the rise in the unemployment rate, is a sign that the job market is finally easing. However, it is worth noting that long-term unemployment remained mostly unchanged, and most of the job losses are in the short-term jobless segments. With the high level of job openings persisting, it means that we may still see some churn in hiring and further job gains in 2023. The labor force participation rate remained steady at 62.6% as gains in labor supply slow down after ramping up over the past few months.
Despite the rise in unemployment, there was still a moderate increase in wages in May. Average hourly wages increased 0.3% MoM which comes out to an annual rate of 3.7%. On an annual basis, wages grew by 4.3% YoY in May, down slightly from the 4.4% YoY observed in April. When analyzing specific sectors, both goods and services wages exhibited similar trends, with a 0.3% monthly increase and a 4.6% and 4.3% year-over-year growth, respectively. These annual wage increases were unchanged from the previous month.
The jobs report today was a weird one. The surveys presented almost polar opposite data in terms of employment gains. With no movement in the participation rate, it means that the confusion lies with households’ and firms’ narratives of the demand for labor. Wage data was also very noncommittal, showing moderate growth despite a rising unemployment rate. At an annual rate of 3.7%, the Fed will still be concerned with wages keeping services inflation sticky. However, it may not be enough of a concern to lead to a June rate hike because several other data points are trending favorably.
Still to come…
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Morning Reading List
Other Data Releases Today
French industrial production grew 0.8% MoM and 0.7% YoY in April. Manufacturing production was up 0.7% MoM and 1.6% YoY. Production of machinery and equipment (5.0% YoY) & of transport equipment (18.1% YoY) are both up strongly on a YoY basis.
France Industrial Production
French industrial output rebounds (ING) - French industrial production rebounded slightly more than expected in April, but without making up for the fall in March. All the indicators point to a weakening in industrial production.
US ISM Manufacturing
Tough Spell for the Manufacturing Sector Continues in May (TD Bank) - The slowdown in the manufacturing sector continues with little relief in sight. Nine consecutive months of falling new orders and order backlogs contracting at their fastest clip since the Great Recession reflect a sector whose near-term outlook is facing significant headwinds.
The ISM Manufacturing Index Declined to 46.9 in May (First Trust Portfolios) - Today’s report on the US factory sector showed that activity continued to slow in May, with the overall index remaining in contraction territory for the seventh month in a row. Looking at the details, only four of eighteen industries reported growth in May. We continue to believe a recession is on the way and today’s report continues to show that the goods sector of the economy is likely to lead the way.
ISM: Just About Every Measure of Activity Slowing... Except Hiring (Wells Fargo) - Today's May ISM shows the fastest rate hikes in a generation are slowing just about everything in the manufacturing sector except the pace of hiring. For the Fed, falling prices and slowing activity without denting the labor market could diminish some urgency on their part to tighten further.
Euro Area Inflation
Euro-area flash inflation: Peak core (Nordea) - Flash inflation surprised to the downside. Especially price increases in food and goods prices have become smaller. At the same time, many indicators point to continuously high inflation expectations but their credibility tends to be low.
Eurozone inflation sharply down to 6.1% in May (ING) - All broad categories of inflation trended down in May, with core inflation dropping to 5.3%. This confirms the downward trend in inflation and sends a dovish message to the European Central Bank.
PMIs
Global factory output buoyed by healing supply chains, but demand for goods continues to fall (S&P Global) - The JPMorgan Global Manufacturing Purchasing Managers' Index™ (PMI™) compiled by S&P Global, registered 49.6 in May, unchanged for a third successive month and indicating a marginal deterioration of business conditions. Conditions have now worsened for nine straight months.
Global producer prices fall for first time in three years (S&P Global) - Average prices charged by factories for their goods fell globally in May for the first time in three years, according to the JPMorgan Global Manufacturing Purchasing Managers' Index™ (PMI™) compiled by S&P Global.
Week Ahead Economic Preview: Week of 5 June 2023 (S&P Global) - Following the release of manufacturing PMI data, services, composite and sector PMI releases will be a key highlight in the coming week for the complete picture on economic conditions in May.
US
Americas CIO View: No ceiling, no landing: 3-5% inflation cruising altitude (DWS Group) -Debt ceiling suspended until Jan 2025: Fiscal health to be general election issue. Inflation is unlikely to land on target this year or next with loose fiscal discipline. Slowflation: It’s not cyclical inflation, it’s structural: Real growth will be very slow.
Sizing Up the U.S. Debt Ceiling Agreement (TD Bank) - An agreement to suspend the debt ceiling was reached on Memorial Day weekend and after being passed by the House of Representatives on Wednesday evening has now been sent to the Senate. The agreement, outlined in the Fiscal Responsibility Act of 2023, suspends the debt ceiling for two years and caps discretionary spending for 2024-2025. This is expected to marginally reduce the fiscal deficit over the next decade and have a relatively small impact on the economy overall.
Construction Spending Climbed Higher in April: Residential Perked Up While Nonresidential Continued to Strengthen (Wells Fargo) - Total construction spending advanced 1.2% during April. The monthly gain translates to a 7.2% annual increase. Total outlays have now risen for three consecutive months. While the threat of a recession looms large, the construction industry appears to be enjoying more favorable supply-side conditions at present.
US Monthly GDP Index for April 2023 (S&P Global) - Monthly US GDP rose 0.4% in April following a flat reading in March that was revised down from a previously estimated 0.3% gain. The increase in April reflected positive contributions from domestic final sales (mostly personal consumption expenditures but also nonresidential fixed investment) and nonfarm inventory investment that were partially offset by a decline in net exports.
Do Economic Crises in Europe Affect the U.S.? Some Lessons from the Past Three Decades (Liberty Street Economics, NY Fed) - In this post we summarize the main results of our contribution to a recent e-book, “The Making of the European Monetary Union: 30 years since the ERM crisis,” on the economic and financial crises in Europe since 1992-93, and focus on the spillovers of those crises onto the United States and the global economy. We find that the answer to the question in the title of this post is a (moderate) yes.
The "Secret Sauce": The LGBTQ+ Community & State Economic Growth Rates (Wells Fargo) - We analyze the effect that the LGBTQ+ community may have on economic growth rates in the 50 states and the District of Columbia. We start by defining a ratio of LGBT representation, which measures the degree of over-representation or under-representation of the LGBT population of each state relative to its share of the overall U.S. population. We then calculated average per annum growth rates of real gross state product (GSP) for each state over the 2010-2019 economic expansion.
Europe
ECB Watch: In search of sufficiently restrictive policy stance (Nordea) - The ECB’s May monetary policy account confirmed that the central bank remains preoccupied with upside inflation risks and despite slowing down the pace of hikes, it was seen as imperative to emphasize that hikes will continue going forward.
The sustainability of France’s public debt moves back into the spotlight (ING) - In France, the sustainability of public finances has once again become an important issue for the government, the general public and the rating agencies alike in a context of economic slowdown, rising interest rates and a minority government in parliament. The market reaction has been muted so far but the trend is towards wider spreads.
Türkiye | The economy grew 4% in 1Q23 (BBVA) - Turkish economy grew by 4% y/y in 1Q23 in line with market expectation (vs. 3.9% consensus and 4.3% ours). Assuming no sharp normalization in economic policies ahead of local election in 2024, we expect GDP growth to be in the range of 4-5% in 2023 on the current strong momentum and expected loose policies.
Swedish May PMI: Another low (Nordea) - The manufacturing PMI dropped to 40.6 in May, indicating that production will decline.
European bank bonds show surprising anxiety (DWS Group) - Europe’s bank sector has proven resilient since the Credit Suisse rescue but AT1 bonds have still not fully recovered – making them all the more attractive, in our view.
Australia
Australian GDP Preview: Q1 2023 (NAB) - NAB sees a 0.2% q/q (2.3% y/y) GDP print for Q1 2023. That would mark the slowest quarter of growth since the lockdown impacted read in Q3 2021. Consumption growth is expected to remain soft and dwelling investment is expected to make little contribution. Business investment is a bright spot, with partials pointing to a 0.3ppt contribution in the quarter.
Korea
Korea: consumer prices slow to 3.3% in May (ING) - We expect headline inflation to touch the 2% range as early as June, but the Bank of Korea will likely pay more attention to stickier core inflation and keep its hawkish stance.
Inflation
Commodity prices fall as supply levels approach normality (S&P Global) - Latest data from the Global PMI™ Commodity Price & Supply Indicators by S&P Global showed that commodity prices reportedly fell across the global manufacturing sector in May, amid a broad stabilisation in supply chains.
A tepid Asian market ushers commodity prices lower (S&P Global) - The Materials Price Index (MPI) by S&P Global Market Intelligence decreased 1.8% last week, the eighth consecutive weekly decline and the tenth out of the last twelve weeks. The decrease was broad, as 9 of the ten subcomponents fell. There have now been 16 week-on-week declines in the MPI in 2023, with only 5 weeks seeing increases. The index sits 34% below its year-ago level.
Trade
Trade in Turmoil (IMF) - “Globalization is a fact of life. But I believe we have underestimated its fragility,” United Nations Secretary-General Kofi Annan told the World Economic Forum almost a quarter century ago. Today, the fragility of the liberal international trading system that has underpinned peace and prosperity since the end of the Cold War is all too evident.
Real Estate
Marginal vs. Average Mortgage Rates (St Louis Fed) - The 30-year fixed-rate mortgage is by far the most popular in the U.S.—70% of mortgages are 30-year fixed rate. The 15-year fixed-rate mortgage is the second-most popular with 10%. The remaining 20% is made up of various adjustable-rate mortgages and some shorter-term fixed-rate mortgages. For the remainder of this blog post, we will focus on the 30-year fixed-rate mortgage.
Private Residential Construction Spending Rises in April (NAHB) - Private residential construction spending inched up 0.5% in April, as spending on multifamily homes increased 0.6%. Private residential construction spending increased for the first time since June 2022 amid elevated mortgage interest rates. However, it is still 9.2% lower compared to a year ago.
Slower Growth for AD&C Loans (NAHB) - Despite some negative reporting about private builder access to acquisition, development and construction (AD&C) financing, the volume of total outstanding loans posted a gain during the first quarter of 2023, albeit at the slowest growth rate since the end of 2020. Nonetheless, interest rates for these loans have increased as the Fed has raised the federal funds rate.
Energy
OPEC+ meeting takes center stage in crude oil market (Saxo Bank) - Crude oil prices remain anchored near a cycle low with Brent crude hovering close to $70 per barrel while WTI has slumped back below, currently trading around $68. Not at all comfortable levels for Saudi Arabia and the OPEC+ group of producers ahead of this weekends meeting in Vienna where the group despite internal issues will have to show a united front in order to avoid further losses.
Debt
Sector vulnerability to rising financing costs (Allianz) - With a debt/EBITDA ratio of 3.8x on average, US firms are more leveraged than European ones (3.3x). But Europe has a higher proportion of total debt maturing in one year (20% vs 14% for the US). Looking at the operating cash flow coefficient, net gearing and interest coverage, we find that corporates in Italy, Spain, Belgium, France and the Netherlands seem most exposed to a liquidity squeeze.
Research
What Drove Racial Disparities in the Paycheck Protection Program? (Liberty Street Economics, NY Fed) - Numerous studies of the Paycheck Protection Program (PPP), which provided loans to small businesses during the COVID-19 pandemic, have documented racial disparities in the program. Because publicly available PPP data only include information on approved loans, prior work has largely been unable to assess whether these disparities were driven by borrower application behavior or by lender approval decisions.
Overborrowing, Underborrowing, and Macroprudential Policy (Minneapolis Fed) - In this paper, we revisit the scope for macroprudential policy in production economies with pecuniary externalities and collateral constraints. We study competitive equilibria and constrained-efficient equilibria and examine the extent to which the gap between the two depends on the production structure and the policy instruments available to the planner.
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