U.S. job growth slowed in May as a slide in the labor force participation rate helped pressure the nation’s unemployment rate, suggesting the labor market is edging closer to full employment as doubts linger about the economy’s growth trajectory in the second quarter.
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U.S. employers added 138,000 net new jobs to the rolls last month, below forecasts for 185,000 jobs, data from the Bureau of Labor Statistics showed Friday. The labor force participation rate ticked down to 62.7% from 62.9% the month prior, helping pressure the jobless rate, which also declined to 4.3% from 4.4%, hitting the lowest level since 2001.
Despite the headline miss in May, job creation last month was above the three-month average of 121,000 jobs. Roughly 180,000 new jobs each month are needed to keep up with demand in the labor force. Therefore, the data add fuel to the idea America’s labor market is near full employment – an important factor for the Federal Reserve as it continues on its path to normalizing monetary policy.
“Today’s jobs report reflects that the labor market is tightening, and there’s not as much room for slack as the economy reaches full employment….it’s tough to continue to add 200,000 jobs each month with our unemployment rate below 5%,” said Steve Rick, chief economist at CUNA Mutual Group.
Job creation was boosted by the health care sector (which added 24,000 positions last month), professional and business services (which added 38,000), food and drinking places (added 30,000), and mining (which gained 7,000 jobs). Retail trade, which has been pressured by changing consumer habits, shed more than 6,000 jobs during the month – its fourth-straight month of declines, while job gains in other sectors including construction, financial services and government were little changed.
Average hourly earnings, a closely-watched metric, rose 0.2% during the month, as expected, putting year-over-year wage gains at 2.5%. The figures help reinforce the idea consumer spending, and therefore overall economic growth, will see a bounce back in the current quarter after growth slowed substantially in the first three months of the year from the fourth quarter of 2016, said RSM Chief Economist Joe Brusuelas.
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Job gains in March were revised down to 50,000 from 79,000 while April’s figures were also lowered to 174,000 from 211,000.
Taken as a whole, the jobs report could give the Fed more confidence to raise rates by a quarter percentage point at its meeting later this month. Chair Janet Yellen has repeatedly stated she and the policy-setting Federal Open Market Committee will carefully monitor incoming economic data before moving rates higher in the coming months, noting members continue to be cautious around the slow rate of inflation. The core personal consumption expenditures index, which the central bank uses as its key inflation gauge, registered 1.7% in April, remaining below the Fed’s 2% target.
“Some Fed watchers might see today’s jobs report as a sign for pause in today’s rate-raising environment, however, the labor market is reaching full employment and that should not be taken as a sign of weakness,” Rick said, adding that other factors including a cool spring season will likely been taken into account.
The CME Group’s federal funds futures, a tool used to predict market expectations for changes in monetary policy, showed odds of 93.5% in favor of a rate rise in June, up from 87.7% a week ago.
While it might not derail plans to raise rates at this month’s meeting, President of EverBank World Markets Chris Gaffney said Friday’s figures might influence what the Fed does later this year.
“A rate increase later this month is still almost certain, but today’s report may cause members of the FOMC to delay the shrinking of the Fed’s balance sheet, which investors have priced in for later this year,” he said.
The BLS numbers come a day after payroll processor ADP reported the private sector added 253,000 jobs last month, far outpacing Wall Street’s expectations for a gain of 185,000 jobs. Strength came from business services – which includes technical services, and management and support services positions – which saw the strongest monthly increase since 2014.