The Independent Market Observer

Monday Update: Unexpected Job Growth in May

Posted by Sam Millette

This entry was posted on Jun 6, 2022 11:18:23 AM

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Monday UpdateThere were several important economic data releases last week, with a focus on business and consumer confidence as well as the May employment report. The jobs report was a highlight, as more jobs than expected were added during the month. This will be another busy week of updates, with reports covering international trade, consumer inflation, and consumer sentiment.

Last Week’s News

On Tuesday, the Conference Board Consumer Confidence survey for May was released. Consumer confidence declined by less than expected during the month, dropping from an upwardly revised 108.6 in April to 106.4 in May against calls for a further drop to 103.6. This better-than-expected result left the index above the recent low of 105.7 we saw in February. Confidence has been challenged since last summer largely due to concerns about inflation and the pandemic. The index hit a post-lockdown high of 128.9 last June, so the declines we’ve seen since then highlight the negative impact from concerns about inflation and infections over the past year. Looking forward, we’ll likely need to see further signs of slower inflation before we see confidence return back to the highs from last summer. That said, while confidence has been challenged over the past year, consumer spending growth has remained relatively strong. This is an encouraging sign that consumers remain willing and able to purchase goods and services despite rising concerns about the state of the economy.

On Wednesday, the ISM Manufacturing report for May was released. The index increased more than expected during the month, rising from 55.4 in April to 56.1 in May against calls for a drop to 54.5. This is a diffusion index where values above 50 indicate expansion, so the report indicated that the manufacturing industry grew at a faster rate in May than in April. For most of the past year, high levels of demand for manufacturing goods served as a tailwind for manufacturing confidence and output in May. This better-than-expected result was primarily driven by an unanticipated increase in new orders and output growth. Manufacturers who were surveyed for the report were optimistic that demand will continue to remain strong in the months ahead, which could support continued growth for the manufacturing industry. That said, the report showed that manufacturers continue to face headwinds due to tangled supply chains and labor shortages, but the solid reading for the index in May highlights the resilient nature of the current manufacturing expansion.

Friday saw the release of the May employment report. It showed that 390,000 jobs were added during the month, down from the upwardly revised 436,000 jobs that were added in April but above economist estimates for 318,000 jobs. This marks 17 consecutive months with strong job growth and is an encouraging sign that the momentum from the economic recovery carried over into May. The job gains were widespread across most sectors; however, the leisure, business services, education, and health sectors saw the largest job gains. The underlying data was also solid, as the unemployment rate remained at the pandemic-era low of 3.6 percent. Labor force participation increased modestly from 62.2 percent to 62.3 percent in May, while wage growth slowed on a monthly and year-over-year basis, which is a good sign as the Fed tries to rein in inflation. Overall, this was an encouraging report and showed that businesses remained confident and willing to hire in May despite higher labor costs.

We finished the week with Friday’s release of the ISM Services survey for May. This widely followed measure of service sector confidence dropped by more than expected, as the index fell from 57.1 in April to 55.9 in May against calls for a more modest decline to 56.5. This is another diffusion index where values above 50 indicate growth, so this result still signals expansion for service sector businesses during the month despite the larger-than-expected drop. Service sector confidence dropped this year after hitting a high of 68.4 in November 2021 due to rising medical risks earlier in the year and persistent inflation throughout 2022. That said, the May report showed that service sector businesses are still confident and expanding, just at a slightly slower pace than late last year. High levels of consumer demand for services are expected to support continued service sector expansion in the months ahead which, in turn, should help support economic growth.

What to Look Forward To

We’ll start the week with Tuesday’s release of the international trade report for April. Economists expect to see the trade deficit narrow sharply from a record $109.8 billion in March to $89.4 billion in April. If estimates hold, this would bring the monthly trade deficit back in line with the monthly deficits we saw in January and February. The advance report on the trade of goods during the month showed that the trade deficit for goods fell from $125.9 billion to $105.9 billion in April, as exports increased 3.1 percent and imports dropped 5 percent. International trade was a net detractor for overall economic growth in the first quarter, so a narrowing of the trade deficit from March’s record level would be a positive sign for second-quarter GDP growth. That said, the monthly deficit is expected to remain well above pre-pandemic levels in April due to continued logistical headwinds and the uneven pace of the global economic recovery.

On Friday, the May Consumer Price Index will be released. Economists expect to see consumer prices increase 0.7 percent during the month and 8.2 percent on a year-over-year basis. If estimates prove accurate, this would bring the pace of year-over-year consumer inflation to its lowest level in three months. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to increase by a more modest 0.4 percent during the month and 5.9 percent on a year-over-year basis. Consumer prices have faced steady inflationary pressure over the past year, as tangled supply chains, high levels of domestic demand, and an uneven global economic recovery contributed to large supply-and-demand mismatches across broad swaths of the economy. Looking forward, the Fed is expected to tighten monetary policy throughout the rest of the year and into 2023 to tamp down high levels of inflation.

Friday will also see the release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. Economists expect to see confidence improve modestly during the month, with the index set to increase from 58.4 in May to 58.9 in June. If estimates hold, this would bring the index off of the decade low we saw in May; however, it would still leave confidence well below the recent highs we saw last summer. Consumer confidence has been pressured over the past year by high levels of inflation throughout the economy and rising geopolitical and market risk. Historically, lower confidence levels have been linked to slower personal spending, but consumer spending has remained solid despite lowered confidence during the past year. Looking forward, we’ll likely need to see further progress in slowing the pace of inflation before confidence can rebound back to pre-pandemic levels.

That’s it for this week—thanks for reading!

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