Soft US payrolls, but rates still expected to rise in June

Despite forecasts of a strong report, the latest payroll figures disappointed with the US economy generating 138,000 jobs in May, compared with expectations of a 180,000 gain.

To add to the soft tone, figures for March and April were revised down by 66,000 whilst average hourly earnings growth remained steady at 2.5% year-on-year.

The one sign of strength in the report came from the drop in unemployment to 4.3%, the lowest for 16 years. However, as we have seen throughout this cycle, the fall was largely driven by a drop in the participation rate¹ to 62.7% in May compared with 62.9% in April.

Other reports have been more positive

While the trend in payroll growth (three month moving average) is now at its weakest since 2012, this report was at odds with other data such as the buoyant ADP employment survey and consumer confidence report.

We are relatively dovish on wages and inflation as we believe structural factors are weighing on worker bargaining power. Nonetheless, we still look for wages to accelerate modestly later in the year given the tightness of the labour market.

Rate hike likely in June

The Federal Reserve (Fed) is probably also expecting a pick-up in pay, and with growth on track to rebound in the current quarter, it is still expected to raise rates on 14 June.

Thereafter, we will need to see evidence of rising wages and growth for the Fed to move again this year.

^{1. The participation rate measures the active portion of the labour force. It refers to the number of people who are either employed or are actively looking for work.↩}