Job Growth Blossoms in May

The month's better than expected data make a Fed rate hike in June nearly certain

By David Wyss and Beth Ann Bovino

The job market continues to be hot, as evidenced by the May employment report, released June 4. Payrolls rose 248,000 in May, their third consecutive big jump. The unemployment rate held at 5.6%.

The 248,000 new jobs created in May marks the third consecutive strong month for payrolls, raising employment by 1.4 million from a year ago. The unemployment rate has been flat at 5.6% over the period, as payrolls begin to catch up with the earlier rise in household employment.

The most interesting change is in the manufacturing sector, where jobs rose 32,000 in May. Last month, manufacturing had still not shown any increase in employment in three years, but with the May report and its upward revisions of the last few months, the economy now shows four consecutive months of manufacturing gains. Factory jobs are still down from last May, however.

The May employment gains were across the board, with increases in every major sector except government. Federal civilian employment dropped 25,000. State and local employment was essentially unchanged.

Employment services rose 40,600 in May, accounting for most of the 64,000 rise in professional and business services. Employment services are usually a good leading indicator for future hiring. The increases in transportation (14,800) and leisure and hospitality (40,000) services show the revival of tourism, important especially heading into the summer vacation season.

With the revival in manufacturing employment, it is even hard to complain about the quality of the job increases. The strength in the high-paying manufacturing, transportation, and construction sectors helped boost average earnings. The largest jobs increase was in professional and business services, where the average wage is above manufacturing. Leisure and hospitality, which has the lowest average was, was up strongly in payrolls, but the next lowest sector, retail, has been unusually weak. Although retail sales are doing well, they have been concentrated at big-box and discount stores, where the sales per employee are high.

Nevertheless, employment has regained only about half its recession losses. Between March 2001 and August 2003, the economy lost 2,718,000 jobs. Since August, it has regained 1,435,000.

Average weekly hours were unchanged in May, but were up 0.4 in manufacturing. This bodes well for future manufacturing employment. Nonmanufacturing hours were held back by the rise in part-time employment.

The unemployment rate held at 5.6%, as it has since January despite strong employment growth. This is payback for the previous six months, when unemployment declined despite weak employment. The payroll report is catching up with what the household data had been saying six months ago.

The May employment report makes a June rate hike (the Fed's policy decision will be announced June 30) nearly certain. Markets are beginning to speculate on the possibility of a 50-basis-point hike, but we still expect a quarter-point move. Chairman Greenspan has always elected to warn the markets with a small move first, and with inflation still moderate, there seems no reason for panic.

However, the stronger employment report does make another hike likely in August, since it seems unlikely the Fed can wait until after the election for a second move. Subsequent hikes could be larger than 25 basis points, especially in 2005. We still expect the Fed to move more slowly than in 1994, but perhaps not as slowly as we had previously thought.

Wyss is chief economist, and Bovino a senior economist, for Standard & Poor's

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