If the Federal Reserve is looking for cover in raising interest rates, they got it with the May jobs report.
The June 16-17 FOMC meeting will be interesting as the May employment report proved very strong led by payroll growth and, very importantly, an uptick in wage pressures.
Non-farm payrolls rose 280,000, well above the consensus for 220,000 and near the top-end forecast of 289,000. Revisions added 32,000 to the two prior months.
Average hourly earnings came in at the high end of expectations, up 1 tenth to plus 0.3%. Year-on-year earnings are up 2.3%, a rate only matched twice during the recovery, the last time back in August 2013.
Analysts said this all bodes well.
“The surprising payroll report provides further evidence that the first quarter weakness in the economy has dissipated in the second quarter. While the pressures from a weak global economy and struggling energy industry persist, the U.S. economy has sufficient momentum to make steady gains during the remainder of 2015 and into 2016,” said Sophia Koropeckyj, senior economist and managing director for Moody’s Analytics. “Moody's Analytics expects average monthly payroll gains to somewhere north of 240,000 for all of this year, accelerating to somewhere around 300,000 in 2016. At this pace, the unemployment rate will trend downward and reach full-employment by this time next year.”
The implications for housing were likewise positive, economists said.
“This is very positive for housing. The consensus expectation was for 220,000 jobs and a static unemployment rate of 5.4%. Instead, we got 280,000 jobs plus upward net revisions to prior months and unemployment at 5.5% as more people entered the labor force,” said Jonathan Smoke, chief economist for realtor.com. “The economic backdrop is that we’ve created 3 million jobs over the last 12 months. And almost as important, the critical age group of 25-34 year olds has seen 1 million jobs created over the same time frame.
“Why is that group critical? That is the age range for the typical first-time buyer household, which despite its depressed levels in recent years still represents the largest age cohort of home buyers. As that group’s economic situation continues to improve, their housing activity follows and has a material impact on both existing and new home sales,” he said. “With more jobs, more people in the labor force, and higher wages materializing, this spring’s strong pace for home sales will continue.”
The labor participation rate was up slightly, 1 tenth to 62.9%. The unemployment rate did tick 1 tenth higher to 5.5% which is unexpected but the gain reflects a solid gain in the labor force for both those who found a job and especially those who are now looking for a job.
“The jobs report figures are optimistic, and the best we’ve seen so far this year. It’s encouraging to see more Americans finding job opportunities and with higher wages as the economy continues to strengthen,” said LendingTree founder and CEO Doug Lebda. “Having more consumers active in the job market is essential for a strong housing market, especially as we get further into the spring and summer home buying seasons. However, it’s important to note that as the economy improves, unemployment declines and wages improve, it becomes more likely that the Federal Reserve increases interest rates.”
By industry, professional business services once again leads the list, up 63,000 following a 66,000 gain in April. Within this industry, the closely watched temporary help services sub-component is up 20,000 after two prior gains of 16,000. The rise in temporary hiring points to permanent hiring in the months ahead.
Construction is up 17,000 but follows a 35,000 surge in April. Manufacturing, where exports are hurting, continues to lag, up only 7,000. And mining, which is being clobbered by contraction in the energy sector, is down 17,000 to extend a long run of declines.
“Today’s May jobs report confirms that a rebound in economic activity is in progress. A strong uptick in employment related to discretionary spending, such as in retail trade and leisure and hospitality, combined with a surge in May auto sales to a near-decade high reported earlier this week, suggest that consumers are poised to bounce back after a breather early this year,” said Doug Duncan, chief economist for Fannie Mae. “In addition, the employment report showed an acceleration in average hourly earnings, which is in line with recent trends of strengthening personal income growth and other broader measures of wages and salaries. The consumer response to healthy job growth and lower energy costs that was expected to start the year appears to finally be underway. Consumer spending growth is likely to tick up from its lackluster growth in the prior quarter, but isn’t expected to be as robust as the fourth quarter of 2014.”