This Week In The Economy: Surprising May US Employment Report, Fed’s Beige Book Shows Inflation Weighing Down Economic Activity

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

US Employment Report Shows Robust Job Growth In May

Odds of several interest rate cuts by the Federal Reserve this year dropped further following a much stronger than expected May jobs report.

Upward revisions to March and April payroll numbers — now collectively higher than previously reported, bolster arguments that labor market conditions are stable, albeit at a middling level given that most of the job creation continues to be in just a handful of sectors.

The U.S. economy added 172,000 jobs in May, blowing by expectations for +85,000. The unemployment rate remained at 4.3 percent, matching expectations.

April’s nonfarm payroll employment was revised up from +115,000 to +179,000, and the change for March was also revised up from +185,000 to +214,000. With these revisions, employment in March and April combined is 93,000 higher than previously reported.

The labor-force participation rate remained at 61.8 percent in May. The rate was 62.4 percent for the same month a year ago.

Private service-sector payrolls grew by 120,000 after increasing by 177,000 in April.

Government employment rose by 52,000 in May following growth of just 2,000 in April, fueled by a jump in local government hiring — up by 55,000, largely reflecting a gain in local government, excluding education (+44,000).

Job increases were concentrated in leisure and hospitality, local government, and healthcare. Employment in financial activities contracted.

There was an uptick the manufacturing payrolls, up by 7,000 after coming in flat in April, powered by a 17,000 rise in hiring by employers manufacturing durable goods. Construction was another bright spot in the goods-producing sector, adding 17,000 jobs last month after growing by 9,000 in April.

Meanwhile job growth in the service-providing private sector slowed down noticeably to +92,000 in May from +163,000 and +169,000 in April and March, respectively.

Average hourly earnings are up 0.3 percent in May, compared to +0.2 percent in April. Wages are up 3.4 percent compared to a year ago.

Federal Reserve Survey Shows Middling Economic Growth, ‘Elevated’ Uncertainty

U.S. economic activity grew at a middling pace over the past few months, with businesses grappling with a cloudy outlook and consumers weighed down by rising costs, a report released by the Federal Reserve this week showed. Job growth was heavily reliant on AI/defense industry spending, while inflationary pressures continue to rise.

The Biege Book — a qualitative survey of economic conditions in the 12 Fed Districts — said U.S. GDP grew “at a slight to moderate pace for ten of the twelve Federal Reserve Districts, while one District reported a slight decline and one reported no change.”

Consumer spending remained mixed, varying by income groups amid rising affordability pressures.

“Higher-income households remained resilient and less sensitive to price increase, while middle-income households were described as “squeezing more life out of every dollar before deciding to spend it,” and low-income consumers showed greater financial strain,” the Fed said.

“Overall, there were reports of increased credit card usage, fewer retail visits, and stronger demand for necessities,” it added.

Demand for new cars was soft due to elevated prices and fuel costs, with increased preferences for used and hybrid vehicles. Banks reported stable conditions across most Districts; but home mortgages, consumer, and agricultural loan delinquencies were noted as rising in several of the Districts.

“More broadly, business outlooks for the next six months were reported to have little change in anticipated growth, as elevated uncertainty and signs of weakening consumer spending weighed on sentiment,” the report said.

On the inflation front, the pace of price increases has been “moderate to strong,” mainly fueled by higher energy-related costs due to the conflict with Iran spilling over into shipping, packaging, groceries, and fertilizer.

As for employment, defense spending and the explosion in AI data center construction boosted hiring in the manufacturing sector. Overall, however, it remains a “low-hire, low-fire environment, with workers increasingly reluctant to change jobs because of economic uncertainty.”

“Hiring remained selective and primarily focused on critical roles or attrition replacement,” the Beige Book said.