US employment update eases concerns over economic strength
Quickview: Doubts about the strength of the US economy were assuaged with the release of the employment report for May.
The US employment report for May showed a significant rise in jobs, a drop in the unemployment rate and a solid gain in wages. For the record, non-farm payrolls rose by 223,000 last month, the unemployment rate fell to 3.8% and average hourly earnings rose 0.3% month-on-month. Job growth was broadly based with retail, construction, manufacturing and services all making gains. Manufacturing has added around 250,000 jobs over the past year; a big improvement on its earlier performance.
We believe there are two key points here. First, this report means that a further 25 basis point rate rise from the Federal Reserve (Fed) is close to certain at the next meeting of the FOMC, which concludes on 13 June. Although the annual increase in average hourly earnings only ticked up to 2.7% year-on-year, the monthly gain was ahead of expectations and corroborates a host of other indicators that show the labour market tightening and firms having problems recruiting. Those indicators tell us that wage growth will accelerate further in coming months. To some extent this will be welcome as it will help consumers overcome the rise in gasoline costs and inflation which is currently feeding through to the economy. However, the Fed will see this as confirmation that the economy running out of capacity. Tariffs will only add to the inflationary pressure which is building in the system. We continue to forecast three more rate hikes this year and two more next year.
Second – and on a more optimistic note – the employment report adds to other data which suggests that the first quarter slowdown in the world economy will prove temporary. The ISM manufacturing index bounced back in May and, outside the US, both Germany and Japan reported strong retail sales growth in April, after disappointing figures in March.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.