The US labor market outperformed expectations in May, adding 272,000 nonfarm payroll jobs, surpassing the 180,000 jobs forecasted by economists, according to data released by the Bureau of Labor Statistics on Friday.
Despite this robust job growth, the unemployment rate increased slightly to 4% from 3.9% in April. The May job gains were also significantly higher than the 165,000 jobs added in the previous month.
These figures illustrate the Federal Reserve’s challenge in deciding when to lower interest rates and how quickly. The economy and labor market remain resilient, and inflation persists, suggesting a need to maintain higher interest rates. However, signs of economic strain, such as inflation impacting lower-income consumers and rising household debt, are emerging.
“They’re really walking a tightrope here,” Robert Sockin, Citi senior global economist, told Yahoo Finance, emphasizing the delicate balance the Federal Reserve must maintain. Prolonged high rates could exacerbate economic vulnerabilities.
Wage growth, a key inflation indicator, increased 4.1% year-over-year, reversing the previous month’s downward trend. On a monthly basis, wages rose 0.4%, up from a 0.2% increase in the prior month. “To see more confidence that inflation could move lower over time, you’d really like to see the wage numbers look a little lower than we’ve seen them today,” Lauren Goodwin, New York Life Investments economist and chief market strategist, commented to Yahoo Finance.
The labor force participation rate fell slightly to 62.5% from 62.7% in April. However, participation among prime-age workers (ages 25-54) rose to 83.6%, the highest level in 22 years.
Significant job growth was seen in healthcare, which added 68,000 jobs in May. Government employment increased by 43,000 jobs, and the leisure and hospitality sector added 42,000 jobs.
The report arrives as the stock market has reached record highs amid softer-than-expected economic data, which had boosted investor confidence that the Federal Reserve might cut interest rates by September. However, following Friday’s labor report, the likelihood of a rate cut in September decreased to 53% from 69%, according to the CME FedWatch Tool.
Other data this week also indicated a resilient labor market moving towards pre-pandemic norms. The Job Openings and Labor Turnover Survey released on Tuesday showed that job openings in April fell to their lowest level since February 2021. Notably, the ratio between job openings and unemployed individuals returned to 1.2 in May, aligning with pre-pandemic levels.
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