May Jobs Report & Revised First Quarter GDP
It has been a busy week for U.S. economic data, starting with last Friday’s release of the first revision to Q1 GDP to today’s jobs report for the month of May. Although there are some signs that the pace of growth is slowing, we have not seen anything in recent data to suggest signs of an impending recession or a significant slowdown beyond the current 2-2.5% pace of growth we expect for the rest of the year. Furthermore, the data suggests the Federal Reserve will continue to raise their benchmark rate when they meet later this month. In fact, the market is pricing in a near 100% probability of a rate hike at their June 14-15th meeting.
There were positives and negatives in the labor report for May. The economy created 138,000 jobs for the month, which was well below the estimate of 184,000. However, the Unemployment Rate fell to 4.3%, which was better than expected and the lowest figure since May 2001. Furthermore, the broader measure of unemployment which measures both full-time and part-time workers, the U6, fell again to 8.4% and has fallen a full percentage point over the last 12 months. Still, we are seeing a slowdown in the pace of hiring, as the data for April and May were revised lower resulting in a three-month average of approximately 120,000 jobs created. This is still well above the Federal Reserve’s threshold for job growth, but the trend is starting to slow which suggests the economy may be nearing full employment.
Wages continued to climb, albeit at a measured pace. The 0.2% growth during the month was inline with economists’ expectations, while the annual pace held steady at 2.5% year-over-year. Earlier this week, we saw an increase in personal consumption and personal income data, which suggests that current pace of wage growth is supportive of consumer spending. This is one of the main factors the Federal Reserve is tracking when determining their path of increasing rates. In fact, consumption figures along with increased business investment were the two main factors that resulted in the Q1 GDP figure to be revised from 0.7% to 1.2%. Business investment increased 11% last quarter, which was the fastest pace of growth in five years.
Despite the slowing pace of job growth, we see nothing in the recent economic data to suggest that the Federal Reserve will alter their plan to raise interest rates either in June or later this year. Furthermore, the data is consistent with moderate economic growth that we believe will average between 2-2.5% for the rest of the year.