Schroders Quickview: US payrolls kill June rate rise

A slowdown in non-farm payrolls means the Federal Reserve is likely to wait until September before hiking interest rates.


Keith Wade

Keith Wade

Chief Economist & Strategist

US job growth slowed significantly in May with non-farm payrolls1 rising by just 38,000 compared with expectations of a gain of 160,000.

The gloom was compounded by downward revisions to previous figures which cut 59,000 from job growth in March and April.

Widespread weakness

The strike at telecoms giant Verizon was a factor (estimated to have reduced the total by 35,000), but looking at the sector breakdown, the weakness was widespread.

Payrolls fell in manufacturing, construction and mining and the breadth of hiring was at it lowest since 2010. Meanwhile, the unemployment rate actually fell to 4.7% last month.

However, this was driven by a substantial drop in the labour force as the participation rate moved lower.

In some respects the slowdown in employment should not be a surprise as, against a backdrop of weak activity, productivity growth has been disappointing.

Evidence of a cutback on hiring suggests that the corporate sector is now responding after a poor earnings season in the first quarter of the year.

June rate hike off the cards

More immediately, this report kills off expectations of a rate hike this month.

The Federal Reserve (Fed) will look beyond the noisy monthly numbers, but the trend in non-farm payroll growth is now significantly weaker with the three-month average moving down to 116,000 in May from 282,000 six months ago.

For all its faults, the employment report carries a lot of weight in the Fed’s interest rates deliberations. With low inflation and modest wage growth (average earnings remained at 2.5% year-on-year), the authorities can wait before pulling the trigger.

We stick with our view that the next hike will come in September.

1. Non-farm payrolls are a means of measuring employment in the US and represent the total number of people employed, excluding farm workers, private household employees and those employed by non-profit organisations.

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