Key takeaways
The U.S. job market expanded in May for the 41st consecutive month, with the number of new jobs growing at a surprising pace.
May saw the addition of 272,000 new jobs, a rebound after the rate of growth slowed in April.
The unemployment rate reached 4% for the first time in more than two years, but remains near historic lows.
The May jobs report tempered market expectations that the labor market may be softening. The U.S. economy added 272,000 new jobs during the month, outpacing analysts’ expectations, and significantly outperforming job creation in the previous month. At the same time, the pace of wage growth reversed a recent trend, showing modest acceleration.1
Less encouraging was news that the unemployment rate, which remained below 4% for 27 consecutive months, ended the month at exactly 4%.1 From February 2022 through April 2024, the nation’s unemployment rate ranged between 3.4% and 3.9%, considered historically low levels. It was the longest month-to-month stretch of below 4% unemployment since the late 1960s.2 While the unemployment rate has trended upward, “The 4% number is not a specific concern at the moment,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “It will only become an issue if we see it climb from here.”
Markets reacted to the jobs report, seeing it as a sign that the Federal Reserve (Fed) will need to continue to maintain higher interest rates for longer. The Fed signaled late last year that over the course of 2024, it could implement cuts to the federal funds target rate it controls. That is a reversal of monetary policy pursued in 2022 and 2023. During that time, the Fed raised rates from near 0% to more than 5%. The Fed has held rates steady since July 2023, but recent statements from Fed officials indicate there is no rush to cut rates in the near term. As a result, yields on Treasury bonds jumped significantly with a jobs report reflecting continued labor market strength. Investors appear resigned to the likelihood that interest rates will remain elevated for an extended time period.
Does today’s job market provide any guidance for investors as they set expectations going forward?
In the first five months of 2024, non-farm payrolls grew by an average of 247,800 jobs per month, slightly below 2023’s average.3 May’s jobs report modestly boosted 2024’s average monthly job gains.
The most notable May job gains occurred in health care; government; leisure and hospitality; and professional, scientific and technical services.1
Although May’s unemployment rate reached 4%, the change from previous months is not dramatic. Unemployment is only marginally higher than the most recent low of 3.4% reached in April 2023. There continues to be an unusual imbalance between the number of job openings and the availability of individuals seeking employment. At the end of April 2024, according to the U.S. Bureau of Labor Statistics, there were 8.1 million job openings in the U.S., compared to 6.6 million unemployed persons. That means there are still approximately 1.2 jobs for every unemployed person seeking work.4 The number of job openings moved modestly lower in recent months. “Although the ratio of job openings to available workers has been declining, we still have 20% more positions open than people to fill them,” says Haworth. “This imbalance still favors workers, and that could keep wage pressures elevated.”
“Improving labor participation is one way to address the tightness in the labor market that’s propping up wage gains.”
Matt Schoeppner, senior economist at U.S. Bank
One measure economists watch to forecast potential changes in labor market trends is the weekly new jobless claims report. In the most recent report, issued June 6, 2024, initial jobless claims stood at 229,000. Although the trend shows modestly higher initial jobless claims over the course of 2024, the change is not considerable, and initial weekly jobless claims remain below the highest levels reached in 2023.5 “This tells us that we’re not seeing major corporate layoffs that would push the unemployment rate higher,” says Haworth. “At the same time, recent reports show people aren’t leaving jobs at the rate they once were. That’s an early signal of a slightly softer labor market.”
The labor force participation rate, representing the percentage of the population currently in the workforce, came in at 62.5% in May, just slightly down from March and April.1 Labor force participation is considered a key barometer of the broader economy’s health. The labor force participation rate was higher, at 62.8%, between August and November 2023.3 “Improving labor participation is one way to address tightness in the labor market that’s propping up wage gains,” says Matt Schoeppner, a senior economist at U.S. Bank.
The labor market is holding up despite recent economic slowing. The nation’s economy, as measured by Gross Domestic Product (GDP), grew at an annualized rate of 1.3% in 2024’s first quarter.6 Signs of slower economic growth have not translated into reduced inflation. The most recent reading of the Consumer Price Index showed inflation at 3.4% for the 12 months ending in April 2024. Inflation has lingered between 3% and 3.7% since June 2023.3 “The Fed is looking for incremental, month-to-month declines in living costs,” says Haworth. “Even though Fed officials don’t indicate an expectation of inflation reaccelerating, they also don’t appear to be convinced that rate cuts should occur just yet.” May’s jobs report is perceived by markets as likely to solidify the Fed’s “higher for longer” interest rate policy.
Haworth notes that the Fed is closely monitoring average monthly wage growth, which dropped below 4% for the 12-month period ending in April 2024, but moved higher in May, to 4.1%.1 “The Fed is likely awaiting a sustained, downward trend in wage growth as a positive sign that inflation is easing,” says Haworth.
Fed Chair Jerome Powell, in early May, said that as a result of recent inflation and labor market trends, “the risks to achieving our employment and inflation goals have moved toward better balance. The economic outlook is uncertain, however, and we remain highly attentive to inflation risks.” Powell indicated the Fed wants to be more confident that inflation is moving in the right direction before it begins cutting the fed funds target rate.7
According to Schoeppner, the job market’s ongoing strength may complicate the Fed's rate cutting plans. A tight labor market offering more competitive wages has played an important role providing consumers the wherewithal to maintain higher spending levels. That heightens the risk that inflation could persist or even trend higher.
Investors continue to closely follow jobs data for signs of a slowdown, which could provide the Fed with the impetus to begin cutting interest rates. Lower rates are considered a way to provide a boost to the economy, which would likely help extend the stock market rally that began in 2023.
Talk with a wealth professional if you have questions about your personal financial circumstances or investment portfolio.
The job market refers to the marketplace where individuals seek work and employers seek workers. The strength of the job market is considered one important measure of the current health of the broader economy. If more jobs are being created and demand for labor is high, it tends to reaffirm the presence of an expanding economy. By contrast, higher unemployment levels and low job growth (or a decline in job growth) indicate a slowing economy.
The unemployment rate, reported monthly by the U.S. Bureau of Labor Statistics, provides significant insight into the health of the nation’s economy. Generally, the lower the unemployment rate, the stronger the economy is likely to be. The unemployment rate is also one of the mostly closely followed indicators. It’s important to note that the unemployment rate reflects people who are out of work but still seeking employment. It does not reflect others who have stopped looking for work or consider themselves no longer in the labor force.
When the unemployment rate moves higher, it indicates potential weakening of the economy. Consumers may consider holding back on purchases if they have concerns that they, themselves, could face unemployment in the near future. If that occurs, it can potentially contribute to further economic weakness. When unemployment is low, it’s a good indicator that the economy is strong and expanding.
The Federal Reserve is focused on fighting inflation with monetary policy intended to slow consumer demand. Does this put the economy at risk of a recession?
With inflation retreating and interest rate cuts likely coming later this year, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
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