The red-hot labor market is refusing to cool down, showing the remarkable resilience of President Joe Biden's economy but also making the Federal Reserve’s battle to curb inflation that much harder.
The U.S. economy added 339,000 jobs in May, blowing through Wall Street's expectations that employment growth would slow as higher borrowing costs and tighter credit conditions take hold.
"The labor market and the economy it supports will just not go gently into that good night, despite policy efforts to cool both," said Joe Brusuelas, chief economist at RSM, after the Labor Department released the report.
The labor market’s continued strength gives Biden a much-needed boost as he enters the 2024 presidential campaign against a backdrop of lingering pessimism and economic uncertainty. Even with unemployment near record lows, fears of a recession — which swelled after three regional banks collapsed amid surging interest rates — have dogged the White House’s attempts to spotlight the economy’s underlying strength.
The battle over raising the government's borrowing limit also clouded the economic outlook.
The May jobs report landed only hours after Congress passed a bipartisan bill to lift the debt ceiling, averting a possible default that could have upended financial markets and thrown the economy into a slump. That measure, which Biden is expected to sign later today, was hailed as a victory by White House allies who contend that its moderate spending cuts will preserve the president's earlier policy wins and only marginally curtail economic growth.
While the unemployment rate ticked up to 3.7 percent in May and wage growth slowed compared to previous months, the Labor Department also revised its estimates for March and April, saying the economy added 91,000 more jobs than initially reported.
“It's hard to emphasize just how much the current rate of job growth is best described as 'EXTRAORDINARILY ROBUST,'” Justin Wolfers, a professor of public policy and economics at the University of Michigan, tweeted on Friday. “Job growth at this rate, this far into a recovery, with unemployment this low, is pretty close to unprecedented.”
Surging employment figures in professional and business services, health care, and hospitality and leisure — where inflation has been especially stubborn — might prompt the Fed to reconsider a pause in its campaign of interest rate hikes that central bank officials have signaled is coming for at least the June meeting.
Fed Chair Jerome Powell has repeatedly said the labor market needs to soften to help bring down prices. Going into Friday, investors overwhelmingly expected the central bank to hold off on raising rates at its policy-setting meeting on June 13-14.
Fed officials have left further rate hikes firmly on the table, however, even if they don't raise rates this month.
There were hints throughout the week that the employment report would come in strong. Job openings spiked in April after falling the previous three months, the Labor Department announced on Wednesday. Payroll processor ADP’s report for May, published Thursday morning, also came in solid— though there were clear signs of softening at manufacturing and financial companies.
“It's been a wild ride in terms of the data this week,” Gregory Daco, chief economist at EY-Parthenon, said in an interview prior to Friday’s report. “It makes it very difficult for the Fed and for market participants to assess what the Fed’s next move is.”