Another downside surprise, but wage growth hits a six-year high
Employment fell by 7,500 in May. The consensus expectation was for a gain of 23,500. The unemployment rate remained at 5.8%, as expected.
May represented the fourth downside employment surprise of 2018. Along with the run of downside surprises, the pace of job growth has cooled. As shown in Figure 1, employment growth has fallen to 1.3% year-on-year, down from a 2.3% pace in December 2017.
The downside surprise to the headline employment change was the result of a 31,000 drop in full-time employment. The consensus expectation was for a gain of 15,000.
Goods-producing employment fell by 29,000, with declines in four of the five categories led by manufacturing and construction. Services sector employment rose by 21,500, led by transportation and warehousing, finance, professional and scientific, and accommodation and food services.
Despite the downside surprise to the headline employment reading, wage growth accelerated. Average hourly wages rose by 3.9% year-on-year. While some of the upward pressure on wages has come from increases in minimum wages, a key driver of the upward momentum has come from permanent employees.
To us, today's employment report reinforces other evidence that the pace of job growth is cooling. This does not come as a surprise. Between 2016 and 2017, job growth accelerated with the vibrant labour market reflecting brisk economic growth. Between 2016 Q3 and 2017 Q2, GDP growth averaged 3.8% per quarter. However, since mid-2017, GDP growth has decelerated to a pace of just 1.6% per quarter, and the job market has cooled to some extent.
That said, today's jobs report also provided more evidence that the labour market remains tight. First, the unemployment rate remained at its historic low level of 5.8%. Second, and more tellingly, wage growth continued to accelerate. A key wage measure, average hourly wages of permanent employees, is now up 3.9% year-on-year, the quickest pace of wage growth since mid-2012. As permanent employment accounts for more than three-quarters of total employment, this is an encouraging sign regarding household income growth.
It is difficult, however, to tell where employment and wage growth will go from here. We would note that there have been three phases of job and wage growth over the past couple of years. Between 2016 and mid-2017, job growth accelerated, but wage growth slowed. This was a conundrum as one indicator pointed toward job market strength, while the other did not. The conundrum was resolved in the second half of 2017, as job growth remained strong and wage growth accelerated.
In early 2018, we now have the opposite to the situation observed in 2016. Job growth is now slowing, but wage growth has remained strong. If past is prologue, wage growth might be close to peaking, particularly given the downside employment surprises to start the year, and slower GDP growth. In Q1, the economy grew by 1.3%, which itself was a downside surprise to the consensus expectation of growth of 1.8%.
That said, it is also possible that wage growth has picked up and job growth has slowed because firms can't find potential employees with the necessary skills to fill open positions, and thus are paying a premium to retain qualified staff.
Simply put, we need more data to determine the underlying state of the job market at the present time.