Non-farm payroll report is mixed, there is still a possibility that the Fed may pause the rate hike in June.

Non-farm payroll report mixed, Fed may pause June rate hike.

The US Department of Labor reported on Friday that the seasonally adjusted nonfarm payrolls increased by 339,000 in May, far exceeding the economists’ expectations of 190,000 in a survey by the Wall Street Journal, marking the 29th consecutive month of growth. While the recruitment market is hot, other indicators in the report, including an increase in the unemployment rate and a slowdown in wage growth, make it difficult to judge the signal of an interest rate increase.

The report showed that the unemployment rate rose to 3.7% in May, higher than the expected 3.5%. The unemployment rate is the highest level since October 2022, but still close to the lowest level since 1969.

The main reason for the rise in the unemployment rate was a sharp decline of 369,000 in self-employment. This is part of a decrease of 310,000 in the employment population in household surveys, which are used to calculate the unemployment rate and are generally considered to be more volatile than surveys of the overall employment population.

Meanwhile, the overall employment data growth was driven by increases in the service sector, where staffing levels appear to remain below pre-Covid-19 standards. The leisure and hospitality sector added 48,000 jobs, while the healthcare industry added 52,400. Employment in the goods-producing sector continued to remain steady: manufacturing employment decreased by 2,000 while construction added 25,000.

The average hourly wage, a key inflation indicator, rose 0.3% this month, in line with expectations. Year-over-year wage growth was 4.3%, 0.1 percentage point lower than expected. Average weekly hours worked decreased 0.1 hours to 34.3 hours.

One message conveyed by the report is that the banking problems caused by the collapse of Silicon Valley Bank in March appear to have had little impact on the job market. While the decrease in the number of self-employed individuals may indicate that people are having a harder time getting loans to start their businesses, established companies do not seem to be laying off workers.

After the employment report was released, the probability of a rate hike in June rose slightly. According to CME Group data, traders’ bets on a 25 basis point rate hike briefly rose to 38%, falling below 30% as of the time of publication.

June on hold

In recent weeks, Federal Reserve policymakers have been trying to maintain their options, with some seeing inflation as the main risk and others seeing the economy on the verge of a downturn.

Some Fed officials have said or suggested that they may keep rates unchanged at the June 13-14 meeting. Philadelphia Federal Reserve Bank President Patrick T. Harker said this week that he “absolutely supports considering no rate hikes at this meeting,” according to Blocking.

Federal Reserve Board nominee Philip Jefferson said on May 31 that the central bank is inclined to keep rates stable at the June 13-14 meeting so that policymakers have more time to assess the economic outlook.

Nationwide Chief Economist Kathy Bostjancic said in her report that the Fed seems “inclined to skip tightening policy in June but may resume tightening in July. Strong job data today supports this move.”

In addition, some forecasters had expected that May data might be affected by temporary factors before the report came out.

Goldman Sachs economists believe that companies that add jobs in the summer will struggle to find workers as the labor market tightens and many young people remain in school, according to The Wall Street Journal. Morgan Stanley economists believe that factors used to smooth seasonal fluctuations in the labor department will push job numbers down. Despite these obstacles, the May employment report still showed such strong growth that the June employment report could also be very strong.

Half a basis point rate increase in July?

With concerns about the US debt ceiling and banking risks easing, the central bank’s focus will be squarely on still-high inflation and an employment market far stronger than expected, with policymakers potentially hiking rates again in July.

Former US Treasury Secretary Lawrence Summers told Bloomberg in an interview on Friday that if the Fed chooses to delay credit tightening this month, it should be open to a 0.5 percentage point rate hike in July.

Summers noted that economic forecasting agencies have underestimated the strength of job growth for 14 consecutive months, and the US labor market is still hot. This indicates that they have exaggerated the impact of monetary policy on the economy. He said: “I believe that the Federal Reserve will eventually take sufficient measures to curb inflation, which will mean that the economy will be quite weak at some point in 2024.”

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