In a noisy and confusing May employment report, the number of net new jobs rose by a surprisingly large amount while the unemployment rate ticked upward, though it remained at a historically-low number. The underlying picture remains one of significant labor market strength.

In Focus - Employment Trends

The U.S. economy created 339K net new jobs in May, well above expectations. No, wait–– it lost 310K jobs, driving the unemployment rate up from 3.4% to 3.7%.

All of these numbers were from the same BLS report released Friday. Clearly there’s some sorting required.

To begin, while a single report, it is based on two different surveys. The household survey asks roughly 60K households every month about their employment experience. This is the basis of the unemployment rate estimate (3.7% in May). The payroll or establishment survey asks about 122K businesses each month about their employment experience. This is the source of the most closely-followed net new jobs number (339K in May).

Often the two surveys will point in the same direction. More new jobs will mean a lower unemployment rate. Sometimes, they agree on the number of new jobs, but the unemployment rate can still rise if more people enter the labor force. In May, though, the labor force participation rate stayed right where it had been for the previous two months, 62.6%. This month, the two surveys came up with diametrically opposed estimates of job creation. So which reading to believe?

The surveys are not created equal. According to the BLS, the 90% confidence interval for the establishment survey is +/-130K. For the household survey, it’s +/-600K. Both of those are larger than one might think, listening to earnest discussions of how the jobs number “missed” or “beat” expectations by 50K (statistically insignificant in either case). On the basis of precision, though, establishment is the winner, with its positive take on May jobs.

There is also a difference in how one defines a “job.” Does this include self-employed workers? Furloughed workers? Workers on unpaid leave? Each survey takes a different approach. Correcting for this largely removes the discrepancy.

The chart shows the establishment net jobs gain going back to the start of 2021 (dark solid line, left-hand scale). The first, obvious feature is that it’s noisy. This is not due to predictable monthly swings, as the numbers are seasonally-adjusted. The dark dotted line gives a 4-month moving average for the series. That tells a story of job gains that have been slowing since late 2021.

Does that mean a slowing economy? Not necessarily. There are limits to how many people can be hired. At an absurd extreme, you can’t employ more than the entire population. The dotted red line shows a more realistic notional version of this limit: the maximum employment-population ratio for workers aged 25-54 over the last 75 years: 81.9%, achieved in April 2000. The solid red line shows the most recent values of that ratio: 80.7% in May.

What happens when we hit up against a limit? In theory, firms bid higher for the limited number of available workers and wages rise, potentially spurring inflation. In May, average hourly earnings were up 4.3% from a year before.

Bottom line: once we’ve filtered the noise and the contradIctions from the data, we see a very strong labor market, persistently beyond the range in which the Fed will feel that inflation is under control.

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Last week, we published a piece discussing the IPEF supply chain agreement.

Economic Developments

The flash estimate for May Euro area headline inflation was 6.1%, a 0.9% percentage point drop from the April reading. Core inflation, which strips out energy, food and alcohol, also fell to 5.3% from 5.6% in April. Energy prices, a concern since the onset of the conflict in Ukraine, decreased by 1.7%, while services inflation declined to 5.0% from 5.2% in April.

Euro area consumer sentiment continued on its upward trajectory from the all-time low hit in September 2022, rising 0.6% month-on-month in May. Improvements in past and future financial situations and general economic conditions were offset by a decreased willingness to make major purchases.

Euro area unemployment ticked down 0.1% percentage point in April to 6.5% on a seasonally-adjusted basis. The unemployment rate held steady in Germany at 2.9%, while it fell 0.2% in Portugal, the largest drop in the region. Most other major Euro area economies saw falls of 0.1% percentage point. The highest rates continue to be in Spain (12.7%) and Greece (11.2%).

U.S. non-farm productivity decreased 0.8% year-on-year in Q1, according to the latest figures, as output was revised upwards and hours worked down. This is the first time year-on-year productivity has declined for five consecutive quarters since the data series began in 1948. Overall manufacturing sector productivity is off 0.1% since Q4 2019, the beginning of the current business cycle. In the long run, productivity determines a country’s standard of living.

Canada’s Q1 GDP grew at an annualized rate of 3.1% on strong exports and household spending. Exports were up 2.4%, with passenger cars and truck exports accounting for more than half the increase, with the remainder being mainly commodities. GDP contracted by 0.1% in the last quarter of 2022 and the Q1 result exceeded the consensus forecast by 0.5% percentage points.

Last week’s major trade data releases mostly gave cause for optimism, but South Korea’s closely watched export figures revealed another major contraction.

The March WTO Global Goods Trade Barometer increased 3.4 index points from February to 95.6, mainly on an improvement in export orders, the barometer’s strongest forward-looking indicator. It rose to 102.7, with a barometer reading of 100 signifying the sector is on trend. Automotive products, another sub-component, jumped to 110.8 due to strong sales in Europe and the U.S. However, all other sub-components, including container shipping and air freight, remained well-below 100.0.

Germany’s April goods exports increased 1.2% over March and 1.5% over April 2022, reaching €130.4 billion on a calendar and seasonally-adjusted basis. Exports to EU countries were up 4.5% month-month, while exports to non-EU countries were down 2.4, although exports to the U.S. increased 4.7% and to China by 10.1%. Total imports were down 10.3% year-on-year.

South Korea’s May goods exports were down 15.2% year-on-year in May. The flash estimate is not adjusted for the number of operating days, which were 1.5 fewer than May 2022. Automobile exports – particularly hybrids and EVs and SUVs – increased for the 11th consecutive month to hit an all-time high, while semiconductor sales were down 36.2%, albeit compared to a strong May 2022. South Korea is the first major exporter to report the latest month’s trade figures.

Political Developments

President Biden signed into law on June 2nd The Fiscal Responsibility Act, the House bill to raise the U.S. debt ceiling through January 1, 2025. Earlier in the week, the bill passed the Senate with 63 votes in favor and 39 against. The U.S. Treasury had projected it would run out of money to pay all the government’s obligations on Monday, June 5th.

The U.S. and Taiwan’s respective representatives, the American Institute of Taiwan (AIT) and the Taipei Economic and Cultural Representative Office in the US (TECRO), signed the first agreement under their 21st Century Trade Initiative, covering five areas: customs administration and trade facilitation, good regulatory practices, services domestic regulation, anti-corruption, and SMEs. More difficult issues, such as agriculture and digital trade, have yet to be agreed. The current agreement enters into force effective immediately since it does not address market access, i.e. tariff reductions, for any goods.

The U.S. and EU held the fourth ministerial meeting of the joint Trade and Technology Council (TTC), a bilateral forum launched in September 2021. Aimed at strengthening cooperation and resolving potential disputes across a range of issues, like subsidies and investment in green technology and trade in semiconductors, some groups at the table, including governments and non-governmental groups alike, expressed growing frustration over the lack of concrete actions taken. The topic of ‘economic coercion’ appeared on the agenda for the first time, following its inclusion in last month’s G7 joint statement.

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