The May employment report slightly beat expectations, showing that the US economy added 217,000 jobs and the unemployment rate held steady at 6.3%, which continues to be the lowest level since 2008. We saw a moderation of strength in the labor market for the month, and a confirmation of the gains made in April and March.
The winter weather slowdown was a coiled spring for job creation.
The continued strength in the US labor market and the widespread gains in many different industries support our view that the harsh winter depressed economic activity. When the weather improved, the coiled spring was released.
We finally recovered all the jobs lost during the Great Recession.
Not only did the new report show retention of March and April’s strong gains, but the US economy added more than enough jobs in May to actually replace and exceed what’s been lost since 2007. April non-farm payrolls were revised only slightly downward, while March numbers were unchanged.
The jobs report still shows flaws.
While the percentage of long-term unemployed (people out of work 27 weeks and more) has continued to decrease, reaching 34.6% in May, this number is still far higher than the roughly 20% seen in more normal environments. Moreover, the average duration of unemployment remains exceptionally high at 34.5 weeks versus the long-term average of 15.2 weeks. The new report also shows an increase in short-term unemployed, which jumped to 26.2% from 25% in just one month. Ongoing monitoring of these below-the-line shifts is still needed.
Wages grew, but the growth is not meaningful and widespread yet.
While average hourly earnings increased by 0.2%, annualized growth remains low at 2.1% versus the 3.2% long-term average since 1960. However, we do expect to see pockets of wage inflation in specialized areas of the economy where jobs are in demand—such as technology, engineering and technical trades. (The Fed Beige Book has are already reported signs of this.) We expect the Fed to increasingly view wage growth as a key metric for informing its monetary policy, especially considering that its former key metric, the overall unemployment rate, is holding steady at 6.3%. As a reminder, we have already blown past the point at which the Fed had originally planned to begin raising the fed funds rate.
What It Means for Investors
The labor market recovery remains on a positive trajectory but is not yet strong enough in our view; it still needs the Fed’s highly accommodative policies in order to return to a more normalized state. We expect the Fed to focus more on wage growth as an indicator of the health of the labor market—and given that wage growth is currently weak, we expect continued accommodation.
Taken together with the fresh round of accommodation from the ECB, it’s clear that the world is still in an environment of financial repression that continues to reshape the investing landscape. Ongoing easy money from central banks will keep rendering cash and core fixed income less attractive from a risk/reward perspective, so investors shouldn’t be overexposed to these asset classes. Instead, investors should look for exposure to risk assets such as high-yield bonds, convertibles and stocks to help meet their long-term goals.