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A strong U.S. labor market appears to be fraying around the edges, but the economy is still creating lots of new jobs and that’s adding to inflation worries at the Federal Reserve.
Here’s what to watch for in the May U.S. employment report, due on Friday morning.
The forecast
The U.S. is expected to add 190,000 jobs in May, down from 253,000 in the prior month, economists polled by the Wall Street Journal estimate. That would be the second-smallest increase this year.
While Wall Street
DJIA,
welcomes a slowdown in hiring, a gain of 190,000 would still be too strong for a Federal Reserve bent on reducing the demand for labor.
Fed officials believe employment growth has to slow to around 100,000 a month to help the central bank in its fight against inflation. A tight labor market is pushing up wages and making it hard to relieve the upward pressure on prices.
One big caveat: Hiring has exceeded Wall Street forecasts quite regularly. The latest reports on the labor market from ADP and U.S. jobless claims suggest another surprise is possible.
Unemployment rate
The percentage of jobless Americans seeking work is forecast to rise a tick to 3.5%, but that would still leave the rate near a half-century low.
The Fed previously predicted unemployment would climb to 4.5% this year as higher interest rates slowed the economy and caused more companies to either stop hiring or lay off workers.
But the economy would have to grind to a halt or even tumble into recession to lift the unemployment rate as much as the Fed had forecast.
Wage growth
Average hourly wages are forecast to rise a modest 0.3% in May. That would nudge the increase over the past year down to 4.4% from 4.5%.
The rate of pay increases is still far too high for the Fed’s liking. Although higher pay has helped workers cope with higher prices, rapidly rising wages are also making it harder for the Fed to squelch inflation.
The central bank wants to see wage growth return to levels it sees as consistent with low inflation — about 2% to 3% a year.
“There’s no winning for the Fed on this one,” said senior economist Dan North at trade credit insurer Allianz Trade North America. “It’s still below inflation which means wage earners are still underwater, which is a terrible societal ill, but it is still high enough for it to be a concern as a source of inflation.”
Labor force
One good sign for the Fed is the rising share of the population that has a job or is looking for one. When more people are in the labor force, it reduces the upward pressure on wages and helps to keep inflation down.
The so-called labor-force participation rate climbed to a postpandemic high of 62.6% in the spring from a 50-year low of 60.1% early in the pandemic.
Even better, the share of prime-age workers from 25 to 54 topped the prepandemic high, at 83.3% in April. That matches the highest rate since 2008.
The bad news? The high number of prime-age workers suggests further increases in labor-force participation might be harder to come by.
