VTI - The May Jobs Report Could Push The Fed To Raise Rates In June

2023-06-01 06:15:00 ET

Summary

• The May jobs report will help determine whether the Fed raises rates in June.
• The evidence suggests that the demand for labor remains high.
• A structural shift in the labor market may be behind the recent problems.

The BLS jobs report expected on Friday, June 1, may carry greater significance than usual, given the market's uncertainty about the Fed potentially raising rates by 25 basis points (bps) in June. A hot job report is likely to keep the pressure on the Fed, while a cool report could give them a reason to skip a meeting.

The upcoming May job report will offer valuable insights into whether the Fed's monetary policy measures are working to achieve the Fed's goal of easing labor market pressures. However, based on analysts' forecasts and the demand for labor, the May data is likely to support the case for the Fed to continue pushing higher rates at the June meeting (June 13-14).

Forecasts See Strong Gains

Analysts are projecting the creation of 195,000 jobs in May, which would decline compared to the 253,000 jobs added in April. Moreover, the unemployment rate is expected to rise from 3.4% to 3.5%, while average hourly earnings are anticipated to increase by 0.3% month-on-month (m/m) and 4.4% year-on-year (y/y). In April, wages rose by 0.5% m/m and 4.4% y/y.

Interestingly, the non-farm payroll data has exceeded expectations for 13 consecutive months. Whether this trend will continue or if there will be a disappointing outcome this month remains to be seen.

The current trend in job growth appears to be driven by a significant demand for jobs, as indicated by the number of job openings and a shortage of available workers, as reflected in the number of unemployed individuals. Based on the JOLTS (Job Openings and Labor Turnover Survey), the ratio of job openings to unemployed workers stands at 1.78, surpassing the levels observed before the pandemic and at the current higher end of the range. This suggests a scarcity of workers to meet the existing demand for jobs.

Structural Shifts In Labor Market

The pandemic may have caused a structural shift in the labor market. Before the pandemic, approximately 95.1 million individuals were not in the U.S. labor force. That number has risen to 99.7 million, reflecting an increase of 4.6 million workers who are not actively participating in the labor force. Similarly, there were 6.99 million job openings before the pandemic, whereas there are currently 10.1 million job openings, representing a growth of 3.1 million job opportunities.

The critical question is whether these additional workers not in the labor force have permanently retired or left the workforce for other reasons or if there are incentives to encourage them to return to work. Why the number of people not in the labor force has increased is essential because even higher wages may not motivate them to come back.

The difference between job openings and the number of workers who have exited the labor force may be the driving force behind the recent wage inflation and low unemployment rate. Although wage growth is anticipated to increase by only 0.3% in May, April witnessed the most significant single-month wage rise since March 2022.

The BLS jobs report shows that wage growth has also been high on a year-over-year basis for some time. While it isn't expected to change this month, plenty of readings suggest that wages are growing much faster than the y/y changes reported by the BLS, creating a risk for an upside surprise.

If a structural shift has occurred and job vacancies continue to be challenging to fill, restoring balance to the job market will likely take significant time. The resolution will heavily depend on factors such as population growth or workers reentering the workforce, which higher wages may influence.

Rates May Need To Rise

A prolonged imbalance in the job market is likely to keep interest rates elevated for an extended period. It also presents another reason why there is a risk that the Federal Reserve may need to raise rates in June if the current conditions witnessed in labor show no easing of tightness.

While the June job report may not indicate a significant change in the labor market's composition, it could signal progress. Based on the latest JOLTS data, there is still substantial demand for jobs as of the end of April. Moreover, the Indeed job openings data, which closely correlates with the JOLTS data, suggests that the need for labor may have slightly slowed in May. Still, not significantly, an indication that the labor market remains tight, and the May jobs report may be strong once again.

If the jobs data reveals continued robust job growth and persistent wage pressures that are not in line with a 2% inflation target, the Federal Reserve will probably opt to raise rates once again during the June FOMC meeting. As a result, overall Treasury rates would be expected to increase, which could also contribute to a stronger U.S. dollar, which should continue to be a headwind for the broader equity market.

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