The Big Picture

Column Summary:

*Labor market remains resilient; unemployment and wage growth support continued economic growth.

*The May jobs report eased fears of economic recession.

* A resilient labor market reduces the probability of imminent Federal Reserve rate cuts.

Nonfarm payroll growth may be slowing, but it isn't declining. Average hourly earnings growth may be slowing, but on an inflation-adjusted basis, it is still positive. The unemployment rate may be up from a multi-decade low of 3.4%, but at 4.2%, it is still historically low.

The labor market, overall, may not be quite as strong as it once was, but it remains strong enough to lend confidence to the idea that the economy has enough labor market footing to remain on a growth trajectory. 

Some Shortcomings

The May Employment Situation Report, to be fair, wasn't completely above reproach. Some of its shortcomings include the following:

• With the revisions, employment in March and April combined was 95,000 lower than previously reported.
• The number of people working part-time for economic reasons (i.e., due to slack work or business conditions or could only find part-time work) was 4.624 million. While that was down from 4.690 million in April, it was up from 4.415 million in the same period a year ago.
• Employment in the temporary help services industry declined by 20,300.
• The vast majority of the nonfarm payrolls increase in May was driven by two industries: health care and social assistance (+78,300) and leisure and hospitality (+48,000).

With a report as comprehensive as the employment report, there will always be room to find some negatives in it. On balance, the May report was as good as the stock market could have hoped for at the time it was released -- and we don't mean 8:30 a.m. ET.

We mean on the heels of an ADP Employment Report that showed only 37,000 jobs added to private-sector payrolls in May. We mean in the wake of an ISM Services PMI reading for May that showed only its fourth contractionary reading (49.9%) in the last 60 months. We mean in the midst of the U.S.-China trade uncertainty. We mean in the middle of argumentative negotiations over the reconciliation bill.

There was plenty that could have upended the labor market in May, but for the most part, the labor market stood its ground. That is an extremely important variable in assessing the economic outlook.

A Jobs Report That Fits the Bill

If people are gainfully employed, they will be spending money. This is a point we have made often, and it continues to be supported by the data, although the latest Personal Income and Spending Report for April did show some guarded spending activity. With personal income up 0.8%, personal spending rose only 0.2% following a 0.7% increase in March.

There was a lot going on in April to deter spending activity, not the least of which was all the tariff upset that spawned talk of a possible recession for the U.S. economy. That talk was tempered by the subsequent tariff pause announcement and the massive recovery rally that pause ignited, but it was really tempered by the arrival of hard economic data that showed resilience in the economy and activity that belied the ugly sentiment readings seen in the soft data.

Ironically, the April employment report was one of those hard data releases, and now the May employment report also fits that bill.

Some might take exception to that characterization given the softening stature of nonfarm payrolls, but the Treasury market didn't appear to take exception to that view. If anything, it recoiled somewhat at the thought of the economy and average hourly earnings growth being better than feared.

Maturities from the 2-yr note to the 10-yr note all moved up at least 11 basis points following the release of the May employment report, the resilient nature of which cast some doubt on the timing of the Fed's next rate cut. The move took the 2-yr note yield to 4.04% and the 10-yr note yield to 4.51%.

According to the CME FedWatch Tool, the probability of a 25 basis point rate cut to 4.00-4.25% at the July FOMC meeting has been reduced to 16.5% from 31.5%, while the probability of a 25 basis point cut to 4.00-4.25% at the September FOMC meeting has been trimmed to 62.4% from 73.9% the day before the report.

Briefing.com Analyst Insight

The May Employment Situation Report easily surpassed the market's worst fears. It wasn't strong, but it was good nonetheless, and good is good enough right now for a market that is watching the hard data with an eagle eye to determine if it is showing some worrisome deterioration because of the policy uncertainty.

This report didn't suggest as much. Instead, this important body of hard economic data indicated that, overall, the economy is still on solid footing despite the volatility of the stock market and the tariff uncertainty.

The most important takeaway is that the combination of the low unemployment rate and higher-than-expected average hourly earnings growth, which follows a robust 0.8% increase in personal income in April, will keep consumers on a spending path and the economy on a growth trajectory.

Notwithstanding the fact that this report should also keep any rate cut by the Fed on hold, this is a report that the stock market should have been cheering because it is a good economic report that is better for earnings prospects than a truly bad report would be.

--Patrick J. O'Hare, Briefing.com

 (Editor's Note: The next installment of The Big Picture will be published the week of June 23.)