U.S. Added 223,000 Jobs in May; Unemployment at 3.8 Percent

Posted June 1, 2018 12:21 p.m. EDT

The Labor Department released its official hiring and unemployment figures for May on Friday, providing the latest snapshot of the U.S. economy.

The Numbers

— 223,000jobs were added last month. Wall Street economists had expected an increase of about 190,000, according to Bloomberg.

— The unemployment rate was 3.8 percent, down from 3.9 percent in April and the lowest since early 2000.

— Average earnings rose by 8 cents an hour and are up 2.7 percent over the past year.

The Takeaway

The U.S. economy roared into overdrive last month, delivering the strongest job gains since February. The report underscored other recent signs of strength, like robust personal income and spending data reported earlier this week. The unemployment rate for May was at lows not seen since the heady days of the dot-com bubble.

Policymakers at the Federal Reserve are almost certain to raise interest rates when they meet this month and have said they expect at least one more increase later this year, most likely in September or December. The stately pace of the Fed’s campaign to tighten monetary policy has reassured Wall Street, which has been edgy lately over trade tensions and the prospect of a populist-style government in Italy.

Many of the gains in May were centered in the kind of deeply cyclical sectors that tend to perform best late in the economic cycle, like manufacturing, which added 18,000 jobs, and transportation, which registered a 19,000 gain. Less economically sensitive sectors also kicked in last month, with health care employment rising by 29,000.

“It was certainly a good number, with some weather-related bounce back in construction,” said Diane Swonk, an economist with Grant Thornton. While the unemployment rate may have moved in the right direction last month, she added, “it went down for the wrong reason, a reduction in the size of the labor force.”

Although the jobs numbers are traditionally kept under wraps by the Labor Department until the 8:30 a.m. release, in an unusual departure from protocol, President Donald Trump hinted on Twitter an hour earlier that positive data was in store. “Looking forward to seeing the employment numbers at 8:30 this morning,” he tweeted.

Most economists expect the momentum to continue, although the further drop in the unemployment rate and the healthy increase in average hourly earnings may well stoke fears of inflation and, in turn, a more hawkish Fed.

For now, said Michael Gapen, chief U.S. economist at Barclays, the Fed’s plans shouldn’t worry stock-market bulls. “It was a stronger report than expected, but it wasn’t so hot as to lead the Fed to believe it’s behind the curve,” he said. “It will keep the Fed on its gradual normalization path.” Indeed, the stock market rallied in the wake of the news. The Standard & Poor’s 500-stock average was up nearly 1 percent in morning trading. Bond prices dipped slightly as traders braced for the possibility of faster economic growth, lifting the yield on benchmark 10-year Treasury bonds to 2.9 percent.

Gapen believes the unemployment rate could sink as low as 3 percent by the end of 2019. That would bring it to levels last seen in 1953, the height of the economic boom after World War II.

Wages, Wages, Wages

Swonk said the great conundrum in the current economic environment was why wage growth had been so modest. After all, a tighter labor market should prompt employers to raise salaries to keep the workers they have and lure new ones, right?

In theory, yes, but in practice it hasn’t been working out that way — and everything from slow productivity growth to the decline of unions and digital disruption has been cited as a reason.

“This is the last shoe to drop in the labor market,” said Torsten Slok, chief international economist at Deutsche Bank. “It’s just a matter of time before wages start going up more strongly, but there’s frustration that it hasn’t happened yet, even though unemployment is the lowest it has been in almost 18 years.” Besides the other potential causes, Slok has one of his own: While job switchers are being rewarded with raises, people who stay put are not. Nearly 15 percent of what he calls “job stayers” saw no increase in wages in the past 12 months. At comparable periods in past economic cycles, that share was more like 10 percent.

“If you just stay around, you have less bargaining power,” Slok said.

Back From the Sidelines?

Although the proportion of Americans in the job market fell slightly in May, economists are looking for signs that workers who had given up on finding a job were gradually coming back. The labor participation rate was 62.7 percent last month, compared with 62.8 percent in April.

Sectors like construction, energy, transportation and hospitals have been especially tight, Swonk said, with some employers offering signing bonuses to lure workers. For evidence of the trend, she is watching teenage unemployment, which was 12.8 percent last month. In April, it stood at 12.9 percent, down from 14.7 percent in April 2017.

The teenage unemployment rate is significant because this cohort is a prime beneficiary of tight labor markets, Swonk explained. When there was more slack in the system, teenagers had to compete with 50-somethings for scarce jobs. Now as the latter group finds higher-paying positions, young workers are filling the gap.

In some regions, labor markets have gotten especially tight, forcing companies to pony up to compete for workers. Union Pacific, the railroad giant, has long struggled to find mechanics, electricians and other skilled trade workers. But now it is having trouble filling even unskilled positions in some areas. In Council Bluffs, Iowa, where the unemployment rate is under 3 percent, Union Pacific has started offering $20,000 in hiring incentives for train crews — a job requiring no experience or education beyond a high school diploma. In some cases, the company isn’t even waiting for students to graduate to start the recruiting process.

“We have communities where we work where the unemployment rate is a percent and a half,” said Lance Fritz, Union Pacific’s chairman and chief executive. “Finding people to do work there is mostly about getting them in high school and making them aware of the career path so that when they graduate and are in the workforce, we get them.”

Turning to Trucking

When Chris Bogan was laid off last fall by Appleton Coated, a Wisconsin paper mill, he feared the worst. As his family’s main breadwinner, he was earning $28.66 per hour, a solidly middle-class wage in the Neenah, Wisconsin, area, which The New York Times reported on in November.

As it turned out, tightness in one of the industries recently cited in the Fed’s Beige Book economic survey — trucking — came to Bogan’s rescue. The day the mill shut, he signed up for a course at Fox Valley Technical College to get a license to drive trucks. And the day after he graduated, he landed a job at a local trucking company.

“I didn’t wait around,” Bogan said. “I graduated on a Thursday night and went to the trucking company office on Friday morning.”

Trucking accounted for nearly 7,000 of the jobs gained nationwide last month. And the demand for workers that Bogan encountered is part of the larger economic picture in Wisconsin, which boasts one of the nation’s lowest unemployment rates. The jobless rate there stands at 2.8 percent, down from 3.3 percent a year ago.

In fact, after the mill resumed production and Bogan got a call asking if he’d like to come back, he politely declined. Under a Teamsters union contract, Bogan’s employer covers all of the cost of his health insurance, so he’s essentially earning the same take-home pay as before.

“Things are going pretty well,” he said. “I love it. Instead of just watching that machine turning, I’m outside, and it’s different every day.”