The Labor Department said Friday that U.S. employers added 272,000 workers in May, all but eliminating the possibility of the Federal Reserve cutting interest rates early this summer.
Hiring was very strong in May, with the unemployment rate rising to 4% despite a slight decline in the labor force participation rate.
Economists had expected payrolls to increase by 182,000 and the unemployment rate to remain stable at 3.9% from the previous month, according to Econoday.
Over the past three months, the economy added 249,000 jobs.
The number of private sector employees increased by 229,000, up from 158,000 in the previous month. The number of employees in the goods production sector increased by 25,000, while the number of employees in the construction sector increased by 21,000 and the number of employees in the manufacturing sector increased by 8,000.
The private sector services sector added 204,000 jobs. Employment gains were broad-based, with gains in wholesale trade, retail trade, transport and public works, financial services, business services, leisure and hospitality, education, and health care.
43,000 jobs were created in the public sector.
The better-than-expected employment data is likely to postpone hopes of a rate cut until later this year or next.
Average hourly earnings, a closely watched inflation gauge, rose 0.4% from April, double the month-on-month increase and beating expectations of 0.3%. Year-on-year earnings rose 4.1%, accelerating from April’s 3.9% year-on-year increase, which economists had expected to remain steady.
The April estimate was revised down by 10,000 to 165,000, while the March estimate was revised down by 5,000 to 310,000.
In December, the Fed said it would probably do so through rate hikes, and officials projected three rate cuts in 2024. Prices in bond and derivatives markets had suggested the Fed would cut rates as many as six times from its March meeting. After the Fed surprised many investors in January by suggesting it wasn’t prepared to cut rates at its March meeting, many investors believed cuts would begin at its next meeting in May.
Strong inflation reports in the first three months of the year dashed hopes for a rate cut earlier this year. Just before the release of the May jobs report, futures markets were predicting a near zero chance of a rate cut at next week’s Fed meeting, a one in five chance of a cut in July, a 68% chance of a cut in September, an 80% chance of a cut in November, and a 94% chance of a cut in December.
Immediately after the figures were released, the odds changed: July odds fell to under 10%, September odds rose to 54%, November odds fell to 68% and December odds dropped to 88%, according to federal funds futures prices.
The Federal Reserve typically cuts interest rates when it believes the economy is weakening. Growth was very strong last year, especially in the second half of the year, but economists saw the Fed’s rate hikes from March 2022 to July 2023 as a major drag on growth and the labor market this year. Growth slowed to 1.3% in the first quarter of this year.
Some Democratic politicians, progressive economists and Wall Street analysts say the Fed is risking an unnecessary recession by refraining from cutting rates, even as central bank officials, including Chairman Jerome Powell, argue that the strength of the labor market and the overall economy gives them room to be patient.
