Summary of Key Points
The U.S. non-farm payroll data for May far exceeded market expectations, with an increase of 172,000 jobs (almost twice the forecast), and the unemployment rate remained stable at 4.3%. However, the pace of wage growth has slowed slightly. At the same time, inflationary pressures remain high, and real household incomes have continued to decline. This has put the Federal Reserve in a policy dilemma: strong employment prospects have alleviated concerns about a weakening labor market, leading to growing calls for interest rate hikes. Nevertheless, wage growth does not indicate significant inflation, and some institutions believe that the conditions for raising rates are not yet ripe. Market expectations for rate hikes this year have risen, but there is still disagreement.
Detailed Analysis
1. Non-farm Data “Exceeds Expectations”: More Than Just Numbers
The increase of 172,000 jobs in May was nearly double the market's forecast of over 80,000. More importantly, the April figure was revised upward from 115,000 to 179,000, with a total of 93,000 additional jobs in March and April, bringing the average monthly job creation back to pre-pandemic levels over the past three months. By industry:
- Recreational and hospitality sectors were the biggest winners: With 70,000 new jobs (of which 48,000 were in the food and beverage sector, possibly due to increased hiring for the World Cup).
- Local government employment began to recover: An increase of 55,000 jobs.
- The healthcare industry continued to expand: 35,000 new jobs, mainly in outpatient services.
- The financial sector faced challenges: Insurance and banking industries cut 22,000 jobs.
Household surveys also support the improving economic situation: the total number of employed people increased, and the broad unemployment rate (including those who are dissatisfied with their jobs or working part-time) decreased slightly.
2. Wage Growth Slows, but Real Income Strains Are Increasing: Inflation as a “Hidden Thief”
Wages rose by 3.4% year-on-year in May (3.6% in April), which may seem like a slowdown, but the month-over-month inflation rate in April was the highest in three years. This means that, after adjusting for price increases, real disposable household income has declined for three consecutive months, and the savings rate has dropped to its lowest level in four years. In other words, wages are not keeping up with rising prices, reducing people's purchasing power and leading to less savings, which could be detrimental to the U.S. economy, which is heavily dependent on consumer spending.
3. The “New Normal” of the Labor Market: Are 50,000 New Jobs per Month Enough?
Post-pandemic job recovery, increased immigration, and the Trump administration's stricter policies on foreign workers have changed market perceptions of what constitutes a “normal” employment growth rate. Institutions and the Federal Reserve now believe that adding at most 50,000 jobs per month is sufficient to keep up with the natural growth of the working population without causing unemployment or recession. Companies are also cautious: their revenues and profits are sufficient to maintain current staff levels, and they are reluctant to lay off employees (fearing higher costs when the economy improves and they need to hire skilled workers). The Federal Reserve’s Beige Book (a report on business conditions across the country) shows that companies only hire when essential positions are vacant or when employees leave.
4. The Federal Reserve’s Dilemma: Rising Calls for Rate Hikes, but Caution Remains
The May data has alleviated the Fed's concerns about a weak labor market, shifting its focus to inflation. The new Chairman Powell must balance internal disagreements:
- Rate Hike Advocates: Citi Macro suggests that if employment does not suddenly worsen this summer, the likelihood of multiple rate hikes this year will increase; markets are betting on a rate hike in December with nearly 70% probability, and BNP Paribas even predicts three hikes between the end of 2026 and early 2027.
- Cautionists: Morgan Stanley believes that wage growth does not indicate significant inflation, and discussions about rate hikes will cool down. The IMF has delayed the target for inflation to return to 2% from mid-2027 to the end of 2027, emphasizing the need to wait for data before making policy decisions.
5. Are the Conditions for Rate Hikes Still Not Met?
The Oxford Economics Institute argues that the Fed needs a specific condition for raising rates: accelerated inflation in the service sector. This requires three prerequisites: rising inflation expectations, more fiscal easing by the government, and a significant tightening of the labor market. None of these conditions are currently met. Although inflation in energy and AI-related goods is increasing, housing prices are declining, and the labor market is relatively balanced, so wage growth is not likely to drive inflation significantly. Therefore, they believe that the impact of the labor market on inflation is neutral, and it is still too early for rate hikes.
Overall, while the U.S. employment market is strong, the contradiction between inflation and household incomes creates uncertainty in Fed policy. The Fed must balance the need to curb inflation with the potential negative effects of raising rates on the economy, and it will continue to monitor monthly data trends.