Flash Comment US: employment disappointing but not a disaster

• Non-farm payrolls rose by 431,000 in May but this was due to Census hiring which added 411,000. Net revision to the prior two months was -22,000.

• The unemployment rate declined to 9.7%. This was mainly due to a large drop in the labour force of 305,000. Household employment declined by 35,000.

• Private working hours continued to expand at a solid pace. On top of this, average hourly earnings increased more than expected. This leaves total compensation growth robust, despite the slowdown in job growth.

• With recent data continuing to point to strong GDP growth we maintain our expectation of non-farm payrolls reaching an average of 200-250,000 (ex. census) in H2 this year.

Details

The setback in private payrolls in the May employment report was significant. Private services added only 41,000 compared to an average of 98,000 over the past three months. Weakness was seen in the retail trade and in finance. Goods-producing industries hired 4,000 compared with an average of 41,000, but with major differences between sectors. Construction employment declined 35,000 while manufacturing hired 29,000 - somewhat less than the 50,000 indicated by the ISM employment index. Temporary help services continue to expand (+31,000) which is an encouraging sign of future job growth.

Keep in mind that the poor employment report for May comes after a couple of months of healthy job growth. Averaging over the past three months, private payrolls have increased by 140,000, which is not far from the average level during the previous expansion. Nonfarm payrolls are notoriously volatile and with recent data continuing to point to strong overall economic growth, we expect the weakness to be temporary. The unusually high productivity growth cannot continue, eventually businesses will need to hire to expand output.

The unemployment rate declined to 9.7% despite household employment dropping 35,000 as this was countered by an even larger decline in the labour force (-305,000). On the positive side, aggregate hours worked increased 0.3% m/m and so did hourly earnings. This implies healthy compensation growth and our payroll compensation proxy signals an underlying nominal labour income of above 5% - a major positive for consumption.

Outlook and assessment
Despite the setback in May, we remain confident that GDP growth will remain solid enough for the labour market to generate about 200-250,000 new jobs on average in H2. Distortions from the Census will continue as many of the temporarily employed will start leaving their jobs over the coming months. The main risk to this expectation is that the current turmoil in the financial markets proves long lasting, which would be a clear negative for economic activity and hence job growth.