Domestic Hiring Remained Subdued in May

Domestic Hiring Remained Subdued in May

• Services and manufacturing surveys show hiring improved compared to April.
• Labor gains this year are still far behind the normal pace.
• The three-month moving average remains in contraction territory

May is typically a weak hiring month, and this year is no exception…

This week brings a key update as it relates to the economic growth outlook. On Friday, the U.S. Bureau of Labor Statistics (“BLS”) releases its payroll data for May. Wall Street is expecting an increase of 130,000. If that proves to be correct, it will mark a decided slowdown compared to the typical May increase of 233,000 employees since 2017. It will further establish the weakest annual pace of hiring we’ve seen in that time frame…

This year is already off to a weak start, based on April’s numbers. Businesses brought on just 575,000 new employees in the first four months of this year compared to the average gain of 1,163,000 since 2017. That means we’re almost 600,000 hires behind the typical pace. In other words, the results moving forward must be much stronger if we’re going to experience a normal year from an employment perspective.

As we can see in the above chart, May tends to be one of the most difficult months to find gainful employment. Based on recent Fed business surveys, that still appears to be the case. Hiring improved, but barely. And if that’s what the national numbers indicate later this week, it will imply the economy is still slowing. The shift will support the case for more interest rate cuts by the Federal Reserve later this year. That should underpin a steady rally in the S&P 500 Index.

But don’t take my word for it, let’s look at what the data’s telling us…

Every month, a number of regional Fed banks reach out to manufacturing and services companies in their districts. They ask those businesses about the level of activity they’re seeing. They want to gauge whether commerce has improved, worsened, or stayed the same.

I follow the results from the Dallas, Kansas City, New York, and Philadelphia Fed banks. Those four districts combined account for about 25% of national gross domestic product. I break down the employment and inflation pictures in the data. By looking at the results, we can get a sense of what’s happening nationally. In addition, the data comes out just before the end of each month, so it’s like having an early look into what might unfold when entities like the BLS release market-moving data.

Today, we’re just focusing on the employment results. I want to dissect the individual parts and then consider them together. So, let’s start with the manufacturing survey…

The above chart shows us the sector hiring trend since the start of 2019. As you can see, after the pandemic collapse, factory hiring took off. But ever since, the numbers have been gradually easing. On the right side of the chart, you’ll notice that since peaking in January, manufacturing sector employment has been stabilizing. It’s likely due to a rebound in ordering following the April 9 tariff reprieve.

Now look at the same chart from the regional Fed banks’ services sector surveys…

As we can see by looking at the right side of the chart, services-sector hiring imp[roved in May but didn’t break out of the recent range. In fact, this marked the first month the hiring gauge didn’t contract since December. Again, the tariff reprieve and potential trade deals likely encouraged companies to move forward with spending plans.  

But to get a better idea of what’s going on nationally, I combined the two sets of numbers into a single chart. Based on the breakdown of domestic employment, I gave the services data an 80% weighting and the manufacturing numbers a 20% weighting in the combined number…

In the above chart, I compared the numbers on a three-month rolling average. I did this so the swings would be less choppy, and we get a better sense of the trend. As you can see, the combined Fed survey numbers tend to be a leading indicator of national hiring. Notice, the three-month data rose in December, ahead of a big jump in non-farm payrolls. Then they rolled over to start this year. During May, the three-month data contracted for the third straight month. This hasn’t happened since the middle of 2020.

Based on the numbers we just looked at, manufacturing and services sector employment remains subdued. If that proves to be the case when the BLS reports numbers later this week, it will mean the hiring pace to start this year is falling further behind the normal trend

So, if we see weak data on Friday, don’t be surprised if Wall Street’s outlook on rate cuts later this year keeps changing. Fed policymakers like Chairman Jerome Powell and Governor Christopher Waller have said they’re willing to reduce rates more to support growth if employment falters. The change would place downward pressure on borrowing costs, underpinning a steady rally in the S&P 500.

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