Recently, several FOMC members (including doves with voting rights) have communicated that a summer hike in either June or July is a 'live possibility' if incoming data are in line with their expectations and thus the jobs report for May will be an important factor for the Fed's rate decision. A strong jobs report will support the Fed's view that the labour market continues to tighten and increase the possibility of a summer hike further. In this connection it is important to remember that the Phillips curve (which relates wage inflation and the unemployment rate) is key to understand Fed's thinking. A tighter labour market should lead to higher wage pressure thereby pushing core inflation up over the medium-term. Currently markets have priced in a 65% probability of a hike in June and an 80% probability of a hike in July.
We estimate non-farm payrolls increased 160,000 in May in line with consensus, but below the 3M average of 200,000, as we have indicators suggesting employment growth was to the weaker side in May. Firstly, the Markit PMI composite employment index declined to a two-year low in May, which in combination with higher initial jobless claims in May indicates slower job growth. Secondly, there is a strike in the US firm Verizon going on for the sixth consecutive week concerning around 35,000 workers. Workers on strike receiving no payment are likely to fall out of the payrolls count and hence affect total employment negatively. We expect the unemployment rate fell to 4.9% in May, but it is a close call.
We expect average hourly earnings continued to grow around 0.25% m/m in May, which is slightly above the average monthly growth since 2015 of 0.2% m/m. If we are right, the annual growth rate was unchanged at 2.5% y/y. Average hourly earnings fluctuate a lot but in general we have seen a pickup in wage growth since the beginning of 2015, as the labour market has continued to tighten. However, we have seen a small pickup in the participation rate lately and if we continue to see an inflow to the labour force, this would all else equal keep a downward pressure on wage growth.
Looking at the details in the report, we expect employment growth was driven mainly by the service sector although we expect service employment growth slowed to 140,000 in May, the lowest gain since January. We estimate manufacturing employment was unchanged in May. Despite the stabilisation in China and a weaker US dollar, the regional manufacturing surveys and the Markit PMI manufacturing index all point to slower activity in May. Hence, we do not see manufacturing employment increased in May, but still think we have seen the bottom in employment with the large negative corrections in February and March. We estimate construction employment increased by 20,000 in May as the construction sector is doing quite well.
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