The U.S. labor market continues to provide conflicting signals as the May unemployment rate fell to a 16-year low while job creation declined sharply and wage increases lingered near a two year bottom.
Non-farm payrolls posted an unexpectedly weak 138,000 new jobs, well under the 185,000 median forecast and the April total was revised down to 174,000 from 211,000, reported the Labor Department on Friday. The three month moving average skidded to 120,667, the smallest it has been since June 2012.
The standard unemployment rate (U-3) dropped 0.1 percent to 4.3 percent, equaling the lowest rate since March 2001. It has fallen half a percent in the last seven months and is now at or below what many economists consider full employment. It had been expected to remain at 4.4 percent.
The under-employment rate (U-6), which includes people who have looked for work in the past year or are working part-time but want full-time work, dropped to 8.4 percent from 8.6 percent reaching its lowest level since November 2007.
Bond prices fell on the release and equities overcame initial losses to close in positive territory.
The 10-year Treasury lost 5 basis points ending at 2.16 percent its lowest rate since November 11th the last year. The 2-year Treasury lost less than a point closing at 1.29 percent.
The Dow rose 62.11 points ending at 21,206.29, an all-time record. The S&P 500 added 9.01 points to 2,439.07, also a record..
Despite the apparently tight labor market the annual increase in average hourly earnings was unchanged at 2.5 percent.
Compensation gains have fallen quickly in the last five months from their eight year high of 2.9 percent in December and are now just 0.1 percent above the low of the past two years. Annual wage increases fell below 2.3 percent in November 2009 and remained there for the next six years not breaking above that limit until October 2015.
Economists are uncertain why the relatively strong hiring market of the past two years has not forced employers to compete for workers by raising wages. One possibility is the standard labor market gauges, payrolls and the U-3 unemployment rate are not capturing the complete market picture.
The labor force participation rate fell 0.2 percent in May to 62.7 percent just 0.3 percent above its 40 year low.
Although many of these workers are not counted in the normal unemployment rate (U-3) which only tracks as unemployed individuals who have looked for work in the prior month, their presence and the desire of many of them for employment represents a pool of unemployed workers which may acts as a cap on wages.
Economic growth is expected to rebound in the second quarter from the 1.1 percent annualized pace in the first three-months of the year. The Atlanta Fed GDPNow program’s latest estimate on Friday was for 3.4 percent down from its June 1st assessment of 4.0 percent.
The Federal Reserve is still expected to raise interest rates at its June 13-14th meeting with the Fed Funds futures showing a more than 90 percent chance of an increase.
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