Employment Surveys Continue to Diverge; Manufacturing Activity Contracts but Services Expand

Key Takeaways:

• Nonfarm payroll employment increased by 272,000 in May, an acceleration compared to the 165,000 jobs added in April, according to the Bureau of Labor Statistics (BLS). The non-cyclical healthcare and government sectors continued to drive a large portion of the job gains. Average hourly earnings rose 0.4 percent, double their gain in April. The household survey painted a much weaker picture of the labor market, though, with employment declining by 408,000. The unemployment rate also moved up one-tenth to 4.0 percent, its highest level since January 2022.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings declined by 296,000 to 8.1 million in April, the lowest level since February 2021, according to the BLS. Layoffs and discharges were at 1.5 million, around 300,000 fewer than the 2019 average, while the quits rate was flat at 2.2 percent.
• The Institute for Supply Management (ISM) Manufacturing Index declined 0.5 points to 48.7 in May. The typically leading new orders component fell 3.7 points to 45.4 and is now down 6 points since March. The production index was down 1.1 points to 50.2. The supplier deliveries index was flat at 48.9, indicating that delivery timelines are shortening, and the non-seasonally adjusted prices paid index declined 3.9 points to 57.0.
• The ISM Services Index rose 4.4 points to 53.8 in May, its highest level since August 2023, after briefly dipping below the expansionary threshold of 50 the month prior. The improvement was due in large part to a 10.3-point surge in the business activity index, which hit 61.2, its highest level since November 2022. The new orders index was up 1.9 points to 54.1, while the non-seasonally adjusted supplier deliveries index rose 4.2 points to 52.7.
• Light vehicle sales increased 1.0 percent to a seasonally adjusted annualized rate (SAAR) of 16.1 million in May, according to Autodata. The figure remains roughly 1 million vehicles below its 2019 level.
• Private residential construction spending increased 0.1 percent in April, according to the Census Bureau. Spending on single-family construction rose 0.1 percent, while multifamily construction was down 0.3 percent. Spending on improvements rose 0.3 percent.
• The real goods U.S. trade deficit widened by $4.7 billion in April, according to the Census Bureau. While real exports rose 0.5 percent, the larger real imports category jumped 2.4 percent.

Forecast Impact:

Payroll employment increased by more than both consensus and our estimate. The strength in the May report suggests that April was not in fact the beginning of a long-awaited slowdown in job growth, which will likely lead to a near-term upward revision to our payroll employment forecast. However, the persistent divergence between the payroll and household surveys adds risk to our forecast and our broader understanding of the strength of the labor market. The recent Quarterly Census of Employment and Wages (QECW) data (an alternative measure used in benchmarking payroll employment data) suggest that the payroll figures will be revised downward during revisions. However, it will almost certainly not be to the current level of the household employment survey. Further, initial unemployment claims are at a level that would be normal in 2019 and are more consistent with the payroll survey. We believe the true strength of the labor market is likely somewhere in between the payroll and establishment surveys, and we continue to forecast a slowing in economic growth as the year progresses.

The ISM indices were mixed as manufacturing fell further into contractionary territory, while the services index hit its highest level since last summer. While neither indicator has been particularly reliable at predicting activity data in recent years, the balance of the two would be consistent with our forecast for slowing growth as the year progresses. Incoming trade data shows that net exports are likely to weigh on GDP again in Q2, though strength in imports may signal better consumption than recent data releases have suggested. On balance though, the April trade data is likely to cause a downgrade to our net exports forecast, which will weigh on our projected near-term GDP growth outlook.

Nathaniel Drake
Economic and Strategic Research Group
June 7, 2024

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