Labor Market Data Send Conflicting Signals as Economic Activity Generally Weakens

Key Takeaways:

• Nonfarm payroll employment increased by 339,000 in May, while the March and April reports were revised upward by a combined 93,000, according to the Bureau of Labor Statistics (BLS). Jobs gains were relatively broad-based, with large increases in professional and business services, government employment, and health care, though manufacturing employment fell slightly. However, there was significant divergence between the establishment payroll survey and the household survey, the latter of which showed the unemployment rate rising three-tenths to 3.7 percent. While the household survey can be volatile on a month-to-month basis, that’s the highest unemployment rate since October. Average hourly earnings cooled slightly, rising 0.3 percent in May (compared to 0.4 percent in April) and 4.3 percent on an annual basis.
• The Job Openings and Labor Turnover Survey (JOLTS) showed job openings increased by 358,000 in April after three months of declines, according to the BLS. Still, openings in leisure and hospitality hit a two-year low. The quits rate ticked down one-tenth to 2.4 percent, just one-tenth above its pre-pandemic level. Layoffs and discharges declined to 1.6 million after a jump to 1.8 million in March.
• The ISM Manufacturing Index declined two-tenths to 46.9 in May, giving back part of its gain in April. Of the major subcomponents, the largest mover was the new orders index, which declined 3.1 points to 42.6. The production and employment indices each increased and were above the expansionary threshold of 50. The not-seasonally adjusted prices paid index fell 9.0 points to 44.2, its lowest level since December.
• Light vehicle sales declined 6.0 percent to a seasonally adjusted annualized rate of 15.1 million, according to Autodata.
• The Conference Board Consumer Confidence Index declined 1.4 points to 102.3 in May. Confidence in the present situation was down 3.2 points to 148.6, while expectations for the future declined 0.2 points to 71.5.
• Private residential construction spending rose 0.5 percent in April, according to the Census Bureau. The gain was due to increases in spending on multifamily construction (+0.6 percent) and improvements (+1.7 percent). Spending on single-family construction declined 0.8 percent.
• The FHFA Purchase-Only House Price Index rose a seasonally adjusted 0.6 percent in March and reached a new record high. Compared to a year ago, prices were up 3.7 percent (not seasonally adjusted), a deceleration compared to February.

Forecast Impact:

May’s labor market data sent conflicting signals. On one hand, job growth according to the establishment payroll survey has accelerated for the past two months. On a month-to-month basis, this is the larger and generally more reliable employment report, so we will likely be upgrading our near-term job growth forecast. On the other hand, the household survey has been weak over the past two months and showed a net loss of more than 300,000 jobs in May (though some of this difference is due to different definitions of employment between the two surveys). While the household survey is volatile, it may hint that the labor market is actually somewhat weaker than reported by the payroll survey, which relies in part on a model of firm “births” and “deaths” that can be misleading around economic turning points.

Other economic data was generally consistent with an economy that is gradually slowing. The large decline in the new orders component of the ISM Manufacturing Index suggests demand for goods continues to weaken. We expect that a contraction in manufacturing will eventually be one of the sectors that leads the economy into a modest recession.

Despite a weakening economic backdrop, the housing outlook looks a bit better than earlier in the year. The small increase in residential construction spending lines up with relatively strong housing starts data, and the extremely tight inventory of homes for sale is supporting prices. While we continue to expect both to weaken as the broader economy falls into a modest recession later this year, it’s possible that a relative resurgence in the housing market could help delay its eventual start.

Nathaniel Drake
Economic and Strategic Research Group
June 2, 2023

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