US economy posts solid jobs growth despite tight labour market

The US economy registered another month of solid jobs growth in May, despite employers grappling with a historically tight labour market and policymakers’ efforts to cool demand.

Employers in the world’s largest economy added 390,000 jobs during the month, less than the upwardly revised 436,000 positions created during the previous period but more than economists had expected.

The jobless rate steadied at 3.6 per cent, just 0.1 percentage point above the level it stood at in February 2020 before the coronavirus pandemic spread globally.

According to the Bureau of Labor Statistics, leisure and hospitality was among the sectors to see “notable” gains. More than 80,000 positions were added in May, with an additional 75,000 professional and business services jobs created as well. Transportation and warehousing employment rose by 47,000. The only sector to see losses was retail, with the number of jobs declining by 61,000.

“This was a very good, goldilocks report that so far is consistent with a soft landing,” said Ellen Gaske, an economist at PGIM Fixed Income. “These jobs gains are coming alongside decelerating average hourly earnings, so that suggests potentially the economic expansion could turn out to be fairly robust.”

Despite these gains, the rapid recovery of the US labour market — which has far outpaced the sluggish bounceback that characterised the post-global financial crisis period — has been overshadowed in large part by the highest inflation in four decades.

With roughly 1.9 vacant positions for every unemployed worker, there are also broad concerns that a prolonged shortfall of people willing to join the labour force will keep upward pressure on prices as employers are forced to continue raising wages and improving benefits in order to attract new hires and keep those already on payroll.

The data, which was released by the Bureau of Labor Statistics on Friday, did show the labour force increasing by 330,000, but the share of Americans either employed or looking for work — otherwise known as the labour-force participation rate — was little changed. Economists believe labour supply issues are starting to ease, however, helping to explain the moderate pick-up in monthly wage growth.

Average hourly earnings in May rose 0.3 per cent, in line with last month’s increase. On an annual basis, that translates to 5.2 per cent, slightly slower than the 5.5 per cent pace registered in April.

“The deceleration in wage growth is encouraging because it suggests that the broader cyclical price pressures in the economy are close to peaking,” said Michael Pearce, senior US economist at Capital Economics.

President Joe Biden has said tackling high inflation is his administration’s top priority, a message he has sought to fortify in recent days. Earlier this week, he met with Jay Powell, chair of the Federal Reserve, and reiterated his support for the US central bank to do what it takes to contain inflation.

The Fed has already raised interest rates by 0.75 percentage points since March from the near-zero levels that had been in place since the start of the pandemic. That included the first half-point rate rise since May 2000, a tool top officials have indicated will be used repeatedly in quick succession until there is “clear and convincing” evidence that inflation is coming down.

Powell and other policymakers have surmised the Fed will be able to tame price pressures without causing a sharp recession, especially given the strength of the labour market and the sheer magnitude of the demand for workers.

As the Fed lifts borrowing costs by raising rates and shrinking its $9tn balance sheet, the hope is that the number of vacancies falls rather than outright job losses mount.

Brian Rose, senior economist at UBS, said he expects the pace of monthly jobs growth to slow soon, perhaps to around 100,000, given uncertainty about just how many more people are left to return to the labour force.

“We can’t sustain the payroll growth at this pace for very much longer,” he said. “We are going to run out of people to come back to work after the pandemic.”

He said the Fed is on track to cool down the economy without causing undue pain, but other economists are less optimistic about the Fed’s ability to pull off a soft landing.

One complication is the variation in labour market tightness between states and across industries, which a recent analysis by the Financial Times suggests is substantial.

US government bonds sold off after the report, with the benchmark 10-year note trading 0.06 percentage points higher at 2.97 per cent. Two-year Treasury yields, which are most sensitive to changes in monetary policy, rose by a smaller amount, up 0.03 percentage points to 2.66 per cent.