WASHINGTON, D.C. — Nonfarm payroll employment in the United States rose by 175,000 in May, a “Goldilocks-caliber report” that the stock market was probably looking for — not too hot and not too cold, says Ryan Severino, senior economist at Reis. The measured recovery also means the Fed’s bond-buying program is likely to stay intact for a while longer.
The Dow Jones Industrial Average rose almost 208 points, or 1.38 percent, to close at 15,248, on Friday, June 7, the same day the Bureau of Labor Statistics (BLS) released the May employment report.
Net payroll gains in April were revised downward to 149,000 from 165,000 and March was revised upward by 4,000 jobs. Because of the downward revisions to April by the BLS, the three-month moving average of net job gains was 155,000 compared with 207,000 during the first quarter of the year.
“Overall, the revisions are less worrisome than the downward trajectory of new job creation,” emphasizes Severino. “We have yet to see the marked slowdown that we have witnessed in the last few calendar years, but there is still a decline in the pace of new job creation.”
In the wake of the report, all eyes are on the Federal Reserve. “If anything, the report should silence the recent murmurs regarding the Fed slowing down its asset purchases in the near future and likely delays any action until later this year,” says Severino.
The Federal Reserve is currently buying $85 billion a month in bonds, including $45 billion in Treasuries and $40 billion in mortgage-backed securities in order to push down long-term interest rates and boost asset prices and enhance economic growth. This approach taken by the Fed is referred to as quantitative easing.
Inside the numbers
Private payrolls increased by 178,000 in May, while government losses for the month were 3,000. Weak global demand is weighing on manufacturers, which have reduced payrolls for three consecutive months, according to Severino. The veteran economist is quick to add, however, that the resurgent housing market is propping up construction payrolls and will increasingly support building-related manufacturers.
“The breadth of job creation was somewhat wider than we have seen in recent months with roughly 60 percent of industries showing net job increases,” says Severino. “As we have observed in the past, job gains remain concentrated in low-wage temporary, retail and leisure/hospitality positions. Somewhat heartening, though superficially counterintuitive, the unemployment rate increased to 7.6 percent as growth in the labor force outstripped the number of jobs for those re-entering the market.”
The sectors with the strongest monthly gains were professional and business services (+ 57,000, including 25,600 temp jobs), leisure and hospitality (+ 43,000), retail trade, (+27,700), and education and health services (+ 26,000).
Two notable sectors experienced a decline in jobs in May. Total manufacturing employment was down 8,000, despite strong demand for autos and homebuilding materials. The number of government workers fell by 3,000, including a drop of 14,000 in federal employment offset by an uptick in local government hiring.
Despite the disparity between various employment sectors, the 175,000 net increase in nonfarm payroll employment in May exceeded expectations, particularly in the face of sequester-induced spending cuts by the federal government and higher payroll taxes, says Bob Bach, national director of market analytics at Newmark Grubb Knight Frank.
“The key takeaway from this report is that private employers continue to hire, despite these policies, in contrast with Europe where massive austerity programs shoved most countries into recession,” emphasizes Bach.
“The U.S. economy and, by extension, policymakers deserve a qualified pat on the back — qualified because policymakers took a meat-cleaver approach to cutting spending,” adds Bach. “But it has worked so far. Deficits are down without causing severe damage to the economy.”
The U.S. economy has been able to absorb spending cuts and higher taxes, an encouraging sign, says Bach, suggesting that at some point it will be strong enough to absorb rising interest rates. “For commercial real estate, the tradeoff is that a stronger economy will bolster the leasing markets at the same time that it will put upward pressure on interest rates and eventually on cap rates, too.” The goal for policymakers is to manage that transition as gracefully as possible.”
Other Key Takeaways
• There is no sign of wage inflation, says Bach, as private average earnings for all employees increased a negligible 1 cent per hour in May. During the past year, the average wage has risen by 2 percent. “Broad inflation across the economy is unlikely to take root without wage inflation.”
• Average weekly hours worked was unchanged, defying expectations that companies are shifting full-time workers to part-time status as the Affordable Care Act (ACA) is rolled out, according to Bach. The ACA does not require employers to provide insurance for those working less than 30 hours per week.
• The unemployment rate moved up a tenth of a point to 7.6 percent for the “right” reasons, insists Bach, as the civilian labor force expanded by 420,000, outpacing the gain of 319,000 in the employment level.
— Matt Valley