May 2018 Employment Report

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According to the Bureau of Labor Statistics’ (BLS) establishment survey, non-farm payroll employment rose by 223,000 jobs in May -- below expectations of +185,000. In addition, combined March and April employment gains were revised up by 15,000 (March: +20,000; April: -5,000). Meanwhile, the unemployment rate (based upon the BLS’s household survey) edged down to 3.8% because employment gains (+281,000) greatly exceeded expansion of the labor force (+12,000). 

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Observations from the employment reports include:

* For once, the household and establishment surveys were in sync.

* We have often been critical of the BLS’s seeming to “plump” the headline numbers with favorable adjustment factors, but the May numbers do not seem to be a case in point. Although imputed jobs from by the CES (business birth/death model) adjustment were within 8% of the maximum for the month of May (since 2000), the BLS also applied a slightly more negative-than-average seasonal adjustment to the base data. Had average May adjustments been used, employment changes might have been roughly +232,000 instead of the reported +223,000.

* As for industry details, Manufacturing expanded by 18,000 jobs. That result is reasonably consistent with the Institute for Supply Management’s (ISM) manufacturing employment sub-index, which expanded in May at a faster pace than in April. Wood Products employment gained 1,300 jobs (ISM was unchanged); Paper and Paper Products: +200 (ISM increased). Construction employment gained 25,000. 

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* The number of employment-age persons not in the labor force (NILF) rose by 170,000 (+0.2%), to a record 95.9 million. Meanwhile, the employment-population ratio hit 60.4%; thus, for every five people being added to the population, roughly three are employed. 

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* The labor force participation rate (LFPR) slipped to 62.7% -- comparable to levels seen in the late-1970s. Average hourly earnings of all private employees rose by $0.08, to $26.92, resulting in a 2.7% year-over-year increase. For all production and nonsupervisory employees (pictured above), hourly wages advanced by $0.07, to $22.59 (+2.8% YoY). Since the average workweek for all employees on private nonfarm payrolls was unchanged at 34.5 hours, average weekly earnings increased by $2.76 (+0.3%), to $928.74 (+3.0% YoY). With the consumer price index running at an annual rate of 2.5% in April, workers appear -- officially, at least -- to be holding steady in terms of purchasing power. 

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* Full-time jobs gained additional ground in April when jumping by 904,000. Those employed part time for economic reasons (PTER) -- e.g., slack work or business conditions, or could find only part-time work – edged down by 37,000; non-economic reasons: -163,000. Those holding multiple jobs fell by 225,000. 

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For a “sanity check” of the employment numbers, we consult employment withholding taxes published by the U.S. Treasury. Although “noisy” and highly seasonal, the data show the amount withheld decreased in May, by $10.3 billion (-5.2% MoM; -6.1% YoY), to $185.4 billion; it is difficult to conclude anything meaningful from the data beyond observing that the falloff reflects lower withholding rates from the Tax Cuts and Jobs Act of 2017. To reduce some of the volatility and determine broader trends, we average the most recent three months of data and estimate a percentage change from the same months in the previous year. The average of the three months ending May was 1.9% below the year-earlier average -- well off the peak of +13.8% set back in September 2013.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.