May jobs report: a solid positive report, with the important (likely) exception of wages

 

 - by New Deal democrat

My Big Theme for the past few months has been that the AI Boom (or possibly bubble) is counterbalancing a stagnant or even shallowly recessionary rest of the economy. The bottom line is that the May report was the third in a row that not only confirmed that, but suggested the labor market as a whole - against all odds - might be firming. With the major exception of real wages.

Below is my in depth synopsis.

HEADLINES:

• 172,000 jobs gained, Private sector jobs increased 120,000, while government jobs added 52,000, a disproportionately large number. In fact, local government accounted for 55,000 jobs, suggesting a major seasonality glitch in the education sector. The three month average rose sharply to 188,000.
• The pattern of downward revisions to previous months completely reversed this month. March was revised higher for the second month in a row, by 29,000 to 214,000, and April was revised upward by 64,000 to +179,000, for a total increase of 93,000.
• The alternate, and more volatile measure in the household report, rose by 149,000 jobs. But on a YoY basis, this series was negative for the fourth month in a row, by -473,000 jobs, or an average of -39,000 monthly.
• The U3 unemployment rate remained steady at 4.3%. 
• The U6 underemployment rate declined -0.1% to 8.1%.
• Further out on the spectrum, those who are not in the labor force but want a job now rose 76,000 to 6.187 million, about average for the past 12 months..

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn vs. rebounding. These were mixed but mainly positive.

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was unchanged at 41.6 hours, tied for the highest number in 5 years, as it equalled its 2021 peak.

• Manufacturing jobs rose 7,000, the 3rd increase in the last 12 months.
• Truck driving resumed its decline, by -4,400.
• Construction jobs rose +17,000.
• But Residential construction jobs, which are even more leading, declined -1,700, but stayed within the stabilizing trend since last April.
• Goods producing jobs as a whole rose +26,000. 

• Temporary jobs, which have declined by over -650,000 since late 2022, rose by 1,400, continuing to improve from their post-pandemic low set last October.
• The number of people unemployed for 5 weeks or less declined -286,000 to 2.210 million, about average for the past 12 months.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.08, or +0.2%, to $32.31, for a YoY gain of +3.6%, still above its 5 year low of 3.4% set in March. Importantly, this is -0.2% *lower* than the YoY inflation rate through April. We will have to see what next week’s report for May CPI brings.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers increased +0.2%, and is up 1.3% YoY, the best such showing in over 2 years.

• The index of aggregate payrolls for non-managerial workers rose +0.4%, and is up 5.0% YoY, also its highest comparison in almost 2 years.

Other significant data:

• Professional and business employment rose for the second month in a row, by +7,000. These tend to be well-paying jobs. This remains above its October low, it still remains lower YoY by -35,000, which in the past 80+ years - until now - has almost *always* meant recession.
• The employment population ratio declined another -0.1% to 59.1%, vs. 61.1% in February 2020, and its lowest since October 2021, helped by an extremely low comparison month last May.
• The Labor Force Participation Rate was unchanged at 61.8% , vs. 63.4% in February 2020, but tied for its lowest since October 2021.

SUMMARY

This was the third good monthly report in a row, and probably the best of the three, with several significant exceptions. 

Let’s start with the positives. These included not just the headline employment number, but the increase in the leading manufacturing, construction, and the general goods producing sectors. Temporary help jobs and professional and business jobs increased. Short term unemployment decreased. Revisions, for a change, were positive.  

The most noteworthy negative as the low increase in wages, which most likely means that real wages declined again, and that real aggregate nonsupervisory payrolls were most likely flat or negative as well, meaning that very important short leading indicator will remain below its January peak for the 4th month in a row. Also of interest is that the unemployment rate did not decline, despite the extremely low level of jobless claims. Finally, if we deduct the likely seasonality glitch of local education employment, the monthly headline increase would be only 117,000, which while positive is hardly a blowout.

But again, with the important exception of wages, this was a solid positive report.

Jobless claims virtually screaming for lower unemployment rate; is post-pandemic seasonality making a return?

 

 - by New Deal democrat

We are - maybe! - finally seeing some of the unresolved post-pandemic seasonality reasserting itself as to initial jobless claims.

For the record, initial claims rose 13,000 to 225,000 last week, the highest number since early February. The four week average rose 6,500 to 214,750. With the typical one week delay, however, continuing claims declined -8,000 to 1.777 million:

The increase in new claims is noteworthy because for the last three years until last July, even after seasonal adjustment claims had a pattern of bottoming at year end and then rising through late winter and spring until midyear, before declining again. That pattern began to break last summer, as become more apparent when we look at the YoY% changes which are more important for forecasting purposes:

On that basis, initial claims are down -7.8%, the four week average down -7.7%, and continuing claims down -6.3%. But note that beginning last July, even in the face of virtually no job growth whatsoever, jobless claims turned down YoY. They then resumed that YoY decline in earnest last October, and the YoY comparisons have become increasingly negative (a *good* thing for the economy!) ever since.

Well, we’re coming up on the one year anniversary of that change of regime, so it will be interesting to see if the negative YoY comparisons continue, or if they fade away. This week’s numbers are noteworthy in that regard, because they suggest that - maybe - the pattern of increased claims into midyear is reasserting itself. We’ll find out over the course of the summer.

The source of the change in regime probably has to do with the near total collapse in new immigration to the US, and deportations of both Los Illegales, but also detentions and in some cases deportations of green card holders and even a few US citizens; although the exact chain of causation is somewhat obscure.

Finally, let’s take our final look at what these numbers portend for the unemployment rate, which will be updated for May tomorrow:

The sharp declines in both initial and total unemployment claims, which have a decades’ long history of leading the unemployment rate, suggest in the strongest terms that the unemployment rate will not just not increase or stabilize, but actually decline towards 4% or possibly even lower in the next few months. We’ll see how that plays out for May tomorrow.

Economically weighted ISM services + manufacturing indexes show expanding economy, stagnant employment, and rampant inflationary pressures

 

 - by New Deal democrat

The economically weighted ISM manufacturing + services indexes have become one of my favorite datapoints. That’s in part because the former has a nearly 80 year history of being a solid leading indicator, although somewhat attenuated since the start of the Millennium. But the latter now also has a long enough track record that their combined weight has been accurate for the pat 25 years. The second reason is because they are very current: for example, this week’s reports are for May - as opposed to measures like durable goods, which are delayed one to several months.

To recapitulate, since services are about 75% of the economy, they are 75% of the weighting, with the manufacturing report being the other 25%. Additionally, to reduce noise and increase signal, I pay particular attention to the three month moving average of the weighted average. The one drawback of these is that they are diffusion indexes. They do not tell us how “strong” a trend is, but rather how widespread. For example, if 50% of businesses say they are adding employees, 30% say they are laying off employees, and 20% report no change, the number is calculated as 50-30=+20, /2 = +10. Since 50 is the neutral reading 50+10=60. 

On Monday we got the manufacturing report, which was very positive for new orders, but showed a contracting jobs situation, and widespread price increases. This morning’s ISM services report was similar. [Note: in all the graphs below, the manufacturing number is in blue, and the services number in gray].

Let’s start with the headline number, which rose +0.9 to 54.5. But the three month average declined by -0.6, to 54.0. This compares with the manufacturing three month average of 54.8, the weighted average is 54.2:

New orders rose 1.8 to 57.3, although the three month average declined -0.5 to 57.1. Since the manufacturing average was 54.7, the weighted average is 56.5:

In other words, both the headline and the more leading new orders indexes were strongly positive.

But as with manufacturing, the employment situation is not so sanguine. It has been in contraction, and contracted a further -0.1 to 47.9. The three month average declined -1.3 to 47.0. Since manufacturing employment also was in contraction, although “less bad,” at 48.3, the weighted average declined -1.2 to 47.3:

This is the second month in a row that the weighted employment average has indicated contraction, and is close to its low levels of last summer, during which the jobs reports aaveraged no growth at all. By contrast, although I won’t bother with a graph, this morning’s ADP report suggested an increase of 125,000 jobs in May.

Finally, inflationary pressures in services picked up further in May, as prices paid rose 0.6 to 71.3. The three month average rose 2.8 to 70.9. The economically weighted average rose 3.3 to 73.6:

This means that almost 50% more business were raising rather than lowering prices across the broad economy. Note that the above graph, unlike the first three, goes back five years to show that the current situation is almost as bad as the worst of the post-pandemic inflationary spike.

Since gas prices at the pump rose somewhat less on average in May than in March and April, an issue might be whether consumer inflation would abate. The combined ISM reports suggest it will not. In which regard, interestingly the Cleveland Fed’s consumer inflation estimate for May currently rounds to 0.5%.

So the situation with services in May remained economically expansionary, but not for jobs, and with lots of inflation - a virtually identical situation that we saw for manufacturing in the ISM report for that sector two days ago.

April JOLTS report confirms a low-hire, low-fire, and low-quits economy

 

 - by New Deal democrat

The JOLTS report is low on my list of useful tools, but it does break down the labor market further than the jobs report, and it does have several slightly leading components, so let’s take a look at the latest report, which is for April.

Below are job openings (blue), hires (red), and quits (gold) through April, all normed to 100 as of the onset of the pandemic:

Job openings seem to get the lion’s share of attention from most commentators, but I treat them as somewhat fictional, because there are legions of permanent or fictitious job vacancy ads. That being said, they rose sharply, by 731,000 to a nearly two year high of 7.618 million - which mind you follows March’s second lowest number since the pandemic. On the other hand, hires declined -419,000 to 5.116 million, their 3rd lowest reading since the pandemic; and quits also declined, by -183,000, to 2.977 million, their *lowest* reading since the pandemic.  

Layoffs and discharges, which had rebounded sharply from their lowest numbers of 2025 in March, took it all back in April, declining -192,000 to 1.692 million:

This is consistent with the extremely low level of new jobless claims (red, right scale) (which are both more timely and much less noisy) we have seen since November, including a new 50+ year low at the end of April.

Finally, the quits rate (blue) tends to lead the YoY gain in hourly nonsupervisory wages (red). Here is the post-pandemic close-up of the last four years:

The quits rate has alternated between 1.9% and 2.0% for the past nine months. This counts as suggests that YoY wage growth is likely to continue to be stabile in the 3.5%-3.8% range for the next several months. But keep in that wage growth is a lagging indicator, which typically does not abate until a recession is already at hand.

In short, I would ignore the job openings number. As of April, this has remained a low-hire, low-fire, and low-quits economy.

Manufacturing expands in May; April construction expands nominally, but only data center construction in real terms

 

 - by New Deal democrat

May data started out as usual with the ISM manufacturing index. Plus, as a bonus, official government data is finally back on schedule, only 7 months after the end of the shutdown! By which I mean to say, April construction spending was also released, on time.

To cut to the chase, the news about manufacturing was both good and bad, while that on construction was ‘meh.’

Let’s start with manufacturing first. Late last year, I began to notice that the headline regional Fed and ISM numbers were trending “less bad,” and then finally outright positive. That trend continued this month, as the headline ISM manufacturing  number (blue in the graph below) increased 1.3 to 54.0 (recall that any number above 50.0 indicates expansion). The more leading new orders subindex (gray) also rose, by 2.7, to 56.8 suggesting the AI data center related Boom will continue. The three month averages, which smooth out a little volatility, rose 2.2 to 54.8 and 0.2 to 54.7, respectively:

As I have said a number of times recently, I am convinced that all of the activity surrounding AI data center construction and operation, and the affluent consumer spending secondary to the (narrow) stock market Boom associated with it are the only things keeping the US economy from being in recession at present.

That was the good news. As with last month, here’s the bad news. First, the contraction in goods producing employment continued, although it was “less bad” at 48.6 vs. 46.4 in March. The three month average is 48.3, also “less bad” than for all of last year:

This, by the way, is at variance with the official employment report as to goods-producing employment, which has been generally increasing since last October, and specificially, manufacturing employment, which has been increasing since last December. The most likely way for the two numbers to be consistent, since the ISM report is a diffusion index,  is if the gains in employment are narrowly focused, but stronger than a more diffuse weakening.

But the worst news is that there continue to be widespread increases in prices paid. This did decline in April, by -2.5, but the decline was to “only” 82.1. The three month average is 81.7. The graph I show below goes back five year to show that price increases are as widespread now as they were during the worst of the post-pandemic inflation:

As I indicated last month, this is a very sharp inflationary pulse, which is going to pass right through into consumer prices for goods.

Now let’s turn to the second report, for construction spending. 

in the past I have used construction to help track the long leading sector of housing; and in the wake of the Inflation Reduction Act, plus “Liberation Day,” it has also been useful to track manufacturing. But now, via tracking construction of water supply and power, it is also a useful proxy for construction of AI data centers.

In April on a nominal basis total construction spending rose 0.4%, but that was neutered by a -0.4% reduction in March. On a YoY basis, it was up only 0.7%. Residential construction spending rose 0.8%, and up 1.7% YoY. On a longer basis going back several years spending has been generally flat:

The problem with this nominally positive news is that the prices of construction materials rose 1.3% in April alone, and are up 6.7% YoY, meaning that in real terms both headline and residential construction spending was negative; in fact, the worst in nearly three years:

On the other hand, even nominally manufacturing construction continued its slide, down -1.2% for the month and -18.5% YoY (so much for tariffs bringing manufacturing back onshore!):

Finally, as indicated above, spending on power and water supply construction appear to be the best proxies for AI data center related spending. In April, power supply spending rose 0.6%, and it is up 6.8% YoY; while spending on water supply construction declined -0.5%, and is up 4.8% YoY - but is down 5% from its peak last October. Note that in the graph below I norm both to 100 as of the start of the pandemic, to show that power generation construction has increased nearly 40%, and water supply construction spending at its peak had almost doubled:

Although I won’t show the graph, adjusted by inflation in construction materials, only power supply construction spending is higher YoY.

Let’s put this all together. In the long leading sector of housing, spending is higher, but appears really to be related to the cost of materials. In the short leading sector of manufacturing, business is increasing, but spending on new manufacturing plants has been plummeting. The one sector of construction that appears to be truly increasing is power supply construction for AI data centers. And the strong inflationary pulse is continuing.