May Employment Report: From Overemployment to Full Employment (SP500)

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Today, the Bureau of Labor Statistics Reported employment status This was a big change for the U.S. economy in May. Like many labor market reports, this one came in better than expected. The Federal Reserve cut interest rates in July. While the labor market is not yet in a weak state, the May employment report showed it was closer to full employment than it has been since the pandemic began, and I believe any further deterioration could start to weaken the overall economy.

Job changes and job offers suggest a calming labor market

It has become clear that the labor market is not operating at an extremely hot 2022-2023 high. One key data point is the trend in job creation. The 12-month rolling average is expected to bottom out at about 225,000 new job creations per month, a bit higher than pre-pandemic levels but not too far from average job creation in 2018, especially taking into account population growth.

Two other data points on job openings and labor mobility (JOLTS) SurveyThe data, which is released one month after the employment report, supports the full employment theory. It showed that the number of job openings exceeding the number of unemployed people fell to a three-year low in April. Moreover, hiring and separations have both declined slowly, suggesting that the overall labor market is weaker and more stable than it was two years ago.

Unemployment is rising, but it’s not high

The unemployment rate hit 4% in May, the highest level in nearly two and a half years. While many investors may point to this as weakness, it’s important to note that the Federal Reserve has set a long-term target of 4.1%. Unemployment targetThat is, the current unemployment rate is still slightly below the estimated rate for full employment. The May unemployment rate is in line with the Fed’s target rate for 2024. The number of unemployed did increase in May, so the increase in the unemployment rate had more to do with an increase in the actual unemployment rate, not a decrease in the size of the labor force.

Although the unemployment rate rose, the U6 rate, a broad measure of the unemployment rate and marginally employed workers looking for work, was unchanged in May. This means that the number of marginally employed workers (measured by the U6U3 spread) actually fell in May. While it is likely that many marginally employed workers have lost their jobs, the fact that the marginally employed group fell indicates the strength of the supporting labor market with regard to those who are currently employed.

Full Employment Benchmarks – Duration and Labor Force Participation Rate

The May report is the closest we’ve seen to full employment (as opposed to overemployment) since the pandemic, which I believe has led to fundamental shifts in the labor market that have created new benchmarks around unemployment duration and labor force participation that investors should be aware of.

During the transition to full employment, the average duration of unemployment was 21 weeks or less. For reference, the average duration of unemployment in 2018 and 2019 combined was 22 weeks. The number of people unemployed for more than 27 weeks now stands at 1.3 million, in line with the 2018 and 2019 average. These data points, close to the pre-pandemic average, lend further credence to full employment.

As for the labor force participation rate, it fell to 62.5% in May. This is a decline from 2023 levels, but I believe last year’s levels suggested an overemployed economy rather than full employment. Additionally, the demographics of an aging population have played a major role in the downward trend in labor force participation dating back to 2006. In fact, the labor force participation rate has never fully recovered from the declines experienced during the Great Recession.

Wage growth remains a problem, but the cause is unclear

Despite moving toward full employment, wage growth continues to be well above the Fed’s inflation policy target. This is important because trends in wage growth and price growth are closely correlated, and year-over-year wage growth above 4%, higher than April, should be of great concern to investors and the Fed.

Minimum wages may explain the persistence of wage growth. By 2024, half of states will either raise their minimum wage or minimum wage The minimum wage will increase on January 1 or be increased during the calendar year. While it is difficult to determine how many people earn at the state minimum wage, an increase in the minimum wage rate is undoubtedly 78 million workers A person who works on an hourly wage.

The Congressional Budget Office Interesting Model This is to show that an increase in the minimum wage can lead to a slight increase in the unemployment rate, which not only could explain the increase in unemployment seen in 2024, but could also be verified by the fact that the unemployment rate for workers under 45 (who tend to have lower incomes) increased while the unemployment rate for workers over 45 (who tend to have higher incomes) decreased.

Weaknesses to watch out for

One weakness in the labor market is the number of people working full-time, which has declined year-over-year for four consecutive months. This suggests that some of the labor market’s strength may be being taken up by individuals working multiple jobs. And any significant change in the size of the labor force could lead to a permanent increase in the unemployment rate, as the economy is not as well positioned to offer full-time employment to new labor force entrants as it was a year ago.

Conclusion

The transition from an overemployed to a full employment economy has taken longer than many expected. However, risks to inflation remain and may be more political than economic in nature. While the labor market is moving in the right direction to support a rate cut by the Federal Reserve, full employment does not justify such a decision. In fact, current labor market conditions favor keeping interest rates unchanged more than any other direction.