May saw another month of lackluster job growth, with employers adding 559,000 jobs versus 675,000 expected. This report was on the heels of last month’s report of 266,000 jobs created, a miss of over 700,000 expected jobs. The unemployment rate fell from 6.1% to 5.8%, but the improvement was misleading, as 160,000 workers left the labor force. On an encouraging note, claims for unemployment insurance have fallen five weeks in a row. Academic and government surveys show that enhanced federal job benefits, lack of childcare, and continued effects of the virus were the main culprits of employees not returning to work. We expect to see a marked improvement in the labor market as these rationales fade.
While the employment picture leaves something to be desired, the latest productivity numbers of 5.4% indicate that businesses are finding ways to operate more efficiently with fewer workers. Both ISM surveys improved over last month, with the Manufacturing index coming in at 61.2% and Services at 64% (values over 50% indicate growth). Retail and business inventories remain depleted, which bodes well for continued production growth in the coming months. Consumers, the lifeblood of the US economy, remain upbeat with spending on travel, dining, and retail steadily improving. All of this points to a robust US economy with the Federal Reserve estimating GDP growth to be 6.5% in 2021, a rate not seen since the 1980s.
Inflation remains our number one concern, and the latest data shows prices surging across the economy. The chart below shows a sampling of the latest business and consumer inflation indicators. While most of the figures to date can be attributed to base effects (the fact that last year’s prices were so depressed), our concern is that rising inflation is beginning to creep into consumer psyches. The popular press is replete with stories about used car pricing, food price surges, and higher gas prices. In addition, the past two month’s employment statistics have shown wages increasing at a 7.4% annualized rate even as the job composition has leaned heavily toward lower-wage jobs. Higher wages tend to feed inflation, and any sustained wage increases could cause consumer inflation expectations to become unmoored.
Bottom Line: The job market continues to improve, although at a slower pace than economists had expected. Wages are rising as employers lure sidelined workers back to the labor force. Business conditions remain robust as they work to meet breakneck demand brought on by consumers flush with excess cash to spend. Consumer’s social mobility continues to improve as they become more confident returning to public spaces. The Federal Reserve’s position on inflation remains that it is a transitory phenomenon that will work itself out as the economy returns to normal. We will be watching for any changes to that outlook as more data becomes available.