The U.S. economy added a stunning 272,000 jobs in May, far exceeding economists’ expectations, and wage gains also topped estimates, strongly diminishing the chances for an interest-rate cut from the Federal Reserve anytime soon.
Experts had predicted that the economy would add anywhere from 180,000 to 190,000 jobs last month. Instead, the Labor Department said in a statement that job growth increased at a pace that was 40,000 higher than the average for the previous 12 months.
Despite the strong increase in jobs, the unemployment rate rose slightly, from 3.9% in April to 4% in May, possibly because more people were encouraged by what they see in the job market and were out looking for work. Nonetheless, the rate was the highest since January 2022.
Chad Lyon, managing director, global inventory finance, at Wells Fargo told Trade Only Today that the jobs report shows continued strength in the economy, but also the challenges of inflation.
“Traditionally, when prices are stable, a strong jobs report with healthy wage growth would be good for the recreational marine industry,” Lyon said. “However, with elevated inflation means higher interest rates, both long-term rates that affect retail financing and short-term rates that affect floorplan rates, but we still expect [boat] sales will likely remain around their current levels. So, the interest-rate headwinds for the value buyers remains challenging; however, the high-end buyer who is less rate-sensitive should remain steady.”
Lyon said he does not expect the Fed to cut its benchmark interest rate in the near future.
“My view, based on all the analysis I have seen ahead of the report, indicates with these strong numbers that we are not likely to see rate cuts for at least a few more quarters,” he said.
The Fed’s policy-making Federal Open Market Committee will meet next week. Even before today’s jobs report, most economists did not expect a rate cut at that meeting because Fed chairman Jerome Powell and other members of the committee were saying in May that they needed to see more evidence that inflation is slowing to their 2% goal before acting on rates.
Matt Gruhn, president of the Marine Retailers Association of the Americas, took note of the fact that 2024 is a presidential election year.
“I believe, with it being an election year and there being some general discomfort with interest rates and prices and so forth, that there’s a general discontent with how people feel about the economy and the uncertainty that persists around it,” Gruhn told Trade Only Today.
“But I think the real measurables such as jobs suggest that there hasn’t been a negative trigger to lead business leaders to cut back on their staffing. When you add in the reality that many businesses have been understaffed for so long, I’m not sure how effective the jobs reports will be for predicting economic changes.”
Ian Wyatt, director of economics at recreational marine lender Huntington Commercial Bank, told Trade Only Today that the jobs report was “very solid” with good news in the details, as well as the headline number.
“Average hourly earnings are up 4.1% over the past year, outpacing inflation,” he said. “People are actively looking for work: the percent of prime working age (25–54-year-olds) who have a job or are looking for one hit the highest level in 20 years. Health care and leisure and hospitality were two of the leading industries adding jobs. Segments of the economy that had been drags over the past year, such as software/information and finance, have seen payrolls stabilize over the past few months.”
“Employment rose in transportation and warehousing — a segment very much hurt by the pullback in goods spending that impacted the boating industry. A number of spending categories that went through a sugar high just after COVID-19, followed by a crash, seem to be stabilizing. For example, recent RV sales and shipment data has recently improved.”
“While we saw solid job growth in the payroll data, the unemployment rate, which comes from the household survey, ticked up a tenth, to 4.0 percent. The rise in the unemployment rate was largely due to people re-entering the labor force, not due to job losses, so even this increase can be viewed in a positive light. Overall, the household survey over the last several months has shown a less rosy picture than the payroll survey. The job growth picture over the last year is not as rosy in the unemployment report. Estimates of total jobs in the household survey show a somewhat softer labor market. Another sign of a somewhat softer labor market is job turnover: it is lower than you’d normally expect with a 4% percent unemployment rate.”
Wyatt said consumers are very much focused on experiences right now.
“In boating and other areas, we’ve seen a mix of behaviors. Higher-net-worth households have balance sheets and stock portfolios that are in great shape, which is fueling their spending. For more middle-class consumers, we are seeing the combination of sticker shock and higher rates causing some consumers to postpone purchases of products like boats, while others are still buying but trading down.”
“We are seeing evidence in areas like boats and RVs that some consumers are shifting down to cheaper products. While higher rates are a challenge, I think many consumers and investors are getting tired of waiting for rates to decrease. That fatigue could be a positive for boat sales as consumers accept that they may have to wait a long time for rates to come down.”
Wyatt said the interest-rate outlook this year is setting up a lot like 2023.
“In 2023, job growth and inflation outpaced forecasts, so the Fed raised rates higher than it expected,” he said. “By late 2023, some softness in the labor market and other stresses caused by rate hikes caused the ‘Fed Pivot,’ where they started discussing cuts. Right now, we have a data-dependent Fed and, as in 2023, job growth and inflation this year are stronger than expected, which is causing the Fed to push back the date of the first cut.”
“If we see a little more softness in the data, yes, the Fed will cut. But right now this jobs report and recent inflation data are causing the Fed to wait longer until they see a stronger sign in the data that inflation cooled a little more or the labor market is softer. This jobs report tells us the labor market remains solid, and we saw the bond market react with higher yields on Treasuries, and the expectation of a cut this year is diminishing. Rate cut(s) are still possible for this year, but likely late in the year if at all.”
The Labor Department said in the jobs report that average hourly earnings rose by 14 cents, or 0.4%, to $34.91, in May, topping forecasts of an 0.3% increase. During the past 12 months earnings have increased by 4.1%, exceeding the rate of inflation.
The government revised its jobs totals downward for each of the previous two months. The figure for March fell by 5,000 to 310,000, and the total for April declined by 10,000 to 165,000.
The labor force participation rate — the measure of the population that is in the workforce — declined slightly, to 62.5% in May from 62.7 percent in April.
The government said the health care sector topped all categories with a gain of 68,000 jobs in May. It has been a jobs leader for the past year.
A total of 43,000 jobs were added in government employment; hospitality and leisure employment added 42,000; professional, scientific and technical services added 32,000; social assistance employment added 15,000; and retail employment added 13,000.
Before Friday’s jobs report there had been signs that the economy might be slowing.
The Commerce Department said last week that consumer spending rose just 0.2% in April after a downwardly revised 0.7% increase in March. Adjusted for inflation, spending fell 0.1% in April.
In addition, job openings fell in April to their lowest level in more than three years, another government report said. The Labor Department said Tuesday in its Job Openings and Labor Turnover Survey that available jobs fell to 8.06 million from a downwardly revised 8.36 million the previous month.
The cooling the labor market showed was because of reduced hiring rather than layoffs, an encouraging sign for the Federal Reserve. The ratio of job openings to unemployed persons declined to 1.2 in April, and that was the lowest it has been since June of 2021. The Fed closely watches that figure.
Further signs of a slowdown in hiring came on Wednesday when the ADP Research Institute said private payrolls rose by just 152,000 in May. That was the slowest pace since the start of the year.
