NFP Review: Bumper Payrolls Support Hawkish Fed

Summary

• May’s NFP was much higher than expected and other indicators confirmed the strength of labour demand.
• NFP and household (HH) survey employment diverged further which likely reflects immigration undercounting.
• Labour market balance indicators were mixed. Unemployment rose and wage growth accelerated, which could reflect a skills mismatch.
• Overall, Friday’s data suggests continued strong consumption and GDP growth.

Market Implications

• I still expect only one 2024 Fed cut in the June dot plot and no cut in 2024, against the market pricing nearly 1.5 cuts by end-year.

Another Large NFP Surprise

As Sam’s model predicted, May’s NFP surprised on the upside with 272,000 against 180,000 consensus and 165,000 (revised) in April. Also, job growth became broader based (Chart 2).

Steady Hours Worked

Total private sector hours increased somewhat relative to April (Chart 3). Weekly hours worked were unchanged.

A post-pandemic change in preference is imparting a downward bias to hours worked (Chart 4). The share of full-time workers has been falling mainly because a rising share of workers have been voluntarily moving to part-time employment.

The part timers, who truly reflect cyclical labour market slack, are involuntarily (i.e., ‘for economic reasons’). In May, their share of employment fell 10bp relative to April and remained close to pre-pandemic lows.

NFP/HH Survey Difference: Behind-The-Curve Census Bureau?

While NFP increased 272,000, household employment decreased 408,000. However, the two stats cannot be directly compared since they measure different employment concepts.

Rather, NFP should be compared with the adjusted HH survey, which applies NFP definitions to the household data. Adjusted HH survey employment contracted 456,000! On a total employment basis, the NFPS adjusted HH survey difference was the largest on record at 4.1 mn (Chart 5)!

I think NFP is the more reliable employment indicator for two key reasons. First, the NFP survey is less noisy: the 90% confidence interval for NFP is 130,000, against 300,000 for HH survey employment.

Second and most important, the HH employment estimates rely on biased population estimates. The Bureau of Labor Statistics obtains the HH survey employment estimates by applying the proportion of employed Americans obtained from its survey to the Census Bureau’s population estimates.

The Census Bureau has not updated its base case population estimates to reflect the  immigration surge. By contrast, the Congressional Budget Office, a bipartisan government agency that provides highly respected benchmark fiscal and economic estimates, raised its 2024 estimates 3.1mn in 2023 and 6mn in 2024 relative to its 2022 projections, mainly on account of immigration.

The Brookings Institution, a highly respected macro think tank, has analysed the immigration surge and its impact on employment at length. Yet markets do not appear to have fully discounted the surge, possibly because this is politically contentious.

Any estimate of the immigration surge on the labour force involves arbitrariness. Since current immigration is largely undocumented it is also largely unrecorded. Nevertheless, data shows immigration having a large positive contribution to labour supply.

Decreased Labour Supply Could Reflect Data Issues

The labour force (i.e., employed plus unemployed) shrunk 250,000 in April. This was due to a 157,000 increase in unemployed workers offsetting the 408,000 decrease in HH survey employment. However, as mentioned above, this could reflect data issues.

Foreign-born labour force participants increased 263,000 while US-born participants decreased by 171,000. However, employment shares are likely more accurate owing to data issues. The foreign-born labour force share increased 20bp (Chart 6). Long term, the trend continues to be a faster increase in the foreign-born share than before the pandemic, which is consistent with an immigration surge.

Decreased Participation

Participation fell 20bp to 62.5%. Going forward, there is only limited upside as a rising trend in younger worker participation offsets a falling trend in older workers participation (Chart 7). Also, prime age participation has already stabilized above pre-pandemic levels.

Labour Market Balance Remains Elusive

Labour market rebalancing data was mixed. The unemployment rate increased but so did wage growth.

With HH survey employment decreasing 406,000 and the labour force 250,000, unemployment rose 10bp to 4.0%, 10bp above expectations (Chart 8). Since the insured unemployment rate was unchanged at 1.1%, the uninsured unemployment rate rose further, which could be another sign of surging undocumented immigration (Chart 8).

Perhaps the strongest sign of surging immigration is the combination of the NFP well above the 2019 average of 166,000 and rising unemployment rate.

Despite the increase in unemployment, MoM wage growth accelerated to 0.4% against 0.3% expected and 0.2% in April and YoY wage growth accelerated to 4.1% from 3.9% in April (Chart 9).  This confirms the stabilisation of wage growth around 4%, above the 3.5% the Fed deems consistent with its 2% inflation target (based on long-term labour productivity growth of 1.5%).

The combination of rising unemployment and accelerating wage growth could signal a skills mismatch between labour supply and labour demand. Undocumented migrants tend to be low skill. The increase in the uninsured unemployment rate could reflect migrants struggling to enter the US labour market more than US-born workers.

Employment Data Announces Continued Strong Growth

Overall, Friday’s release suggests continued strong GDP growth. Real wage bill (i.e., employment *wages*hours/PCE) YoY growth remained at 3%, assuming conservatively a 0.1% MoM increase in May PCE.

Household income tends to track the wage bill (Chart 10). The latest wage bill announces continued strong household income growth that, combined with a low and stable HH savings rate, implies continued strong consumption. With consumption accounting 70% of GDP, this implies continued strong GDP growth.

Sahm’s rule recession indicator was unchanged at 37bp and remained below the 0.5% recession threshold. That is, based on Sahm’s rule, the economy was not in recession in May 2024.

Market Consequences

Friday’s release was consistent with my expectations of continued above trend growth and core PCE remaining stuck around 3%. It is also consistent with my expectations of no 2024 Fed cuts and of the June dot plot showing only one 2024 cut. This compares with markets showing 1.5 cuts by end-2024.

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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed , the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.

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(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)