Marking the third straight month of meaningfully better-than-expected data, May non-farm payrolls increased by +176k ahead of expectations for a +88k print. There were also significant upward revisions to both March and April (+29k and +64k, respectively), reinforcing our view of a stabilizing labor market despite geopolitical headwinds.
May’s gains were broad-based, and reflecting not only areas of continued strength, but also a broad industrial inflection, driven in part by robust AI capital expenditure. Health care and social assistance, emphasizing the importance of these sectors in service of an increasingly aged demographic, were up +35k and +12k, respectively. Local government hiring was also a standout, adding +55k in May; this was supplemented by an additional +44k in education job gains. Construction, manufacturing, and mining, quarrying, and oil and gas exploration added a combined +29k for the month, with the latter benefiting from the disruption in the Middle East. The strongest sector was leisure and hospitality (+70k), where the typical seasonal uptick has been compounded by a desire to add staff ahead of the FIFA World Cup. The only real area of weakness remains financial services; the loss of -22k jobs in May marks the third straight month the sector has shed workers, perhaps a result of the effects of AI integration in these businesses.
The household survey reflected an upbeat tone as well. While the unemployment rate was steady at 4.3% and the participation rate remained under the 62% mark, the number of employed persons rose by +149k, with unemployed down -66k. In addition, the number of workers who identify as part time for economic reasons also fell by -137k. Average earnings rose by +0.3% month-over-month and +3.4% year-over-year, while average hours were steady at 34.3 – both solid and supportive of U.S. consumers’ ability to maintain current levels of spending, at least in the short-term.
The combination of a stabilized U.S. labor market and the threat of passthrough inflation due to persistently elevated energy prices leaves the Fed little latitude to maintain its easing bias. The question now becomes what the catalyst might be for the Fed to move from a neutral stance – which we expect to be telegraphed in the statement following the June 17 meeting – to a more restrictive stance. Admittedly, financial conditions have tightened as of late, even as the Fed has put further policy changes on hold. However, with stronger economic growth, driven by capital spending, the Fed may need to adopt a more restrictive posture than previously envisioned. While we are rightly concerned about another period of accelerating inflation – particularly given the mounting pressure the U.S. consumer is facing – we maintain our view that the fear of passthrough is overstated and that inflation will cool in the second half.
Both U.S. equity and bond markets responded negatively to today’s print. We believe the move higher in the short end of the U.S. yield curve represents an opportunity and intend to continue to take advantage of these knee-jerk reactions to data releases. In addition, U.S. large cap equities have experienced meaningful gains over the past two months, and while investors may harbor concerns about the potential for higher rates to hinder further gains, the combination of AI enthusiasm and broad-based earnings growth has been the fuel for this rally, and a modest move higher in yields is unlikely to prove a strong enough force to shift that momentum. That said, we are cautious as we look ahead to the next several weeks, anticipating that risk repositioning and the digestion of the SpaceX IPO could translate to higher volatility in the U.S. equity markets. Should this occur, we will look to reposition portfolios in alignment with long-term targets.