ON SECOND THOUGHT

The US unemployment rate can’t go much lower—but don’t start celebrating just yet

First, the good news. The US unemployment rate fell to 4.3% in May, the lowest since 2001 (pdf). Keep that in mind when you consider the rest of today’s somewhat soggy job report.

Now, the bad news. Employers added just 138,000 jobs last month, missing analysts’ expectations for a 185,000 gain. Average monthly job growth so far this year is now 162,000, compared with 178,000 in 2016.

As we’ve written before, weird things can happen when an economy approaches “full employment,” namely that there’s less scope for bumper growth in jobs every month. That’s been the case in recent months, but revisions to past reports also suggests that the labor market may not be as strong as it once seemed. Today’s report revised down the estimates for new jobs in March and April, by 66,000 altogether.

This supports the concerns of Federal Reserve official Lael Brainard. Earlier this month, she said she isn’t convinced the Fed has met its goals of achieving full employment and stable inflation. Instead, Brainard is worried by the fact that low unemployment and the seemingly strong labor market haven’t stoked higher core inflation (which strips out volatile food and energy prices). This implies that there is still room for improvement in the job market.

Another month of mediocre wage growth is further evidence. Average hourly earnings rose 2.5% in May versus a year earlier, the same as in April and slower than the previous months of the year.

Guided by signals from more hawkish central bank officials, markets priced in an interest-rate increase for this month, just three months after the last one. But judging by today’s response to the job numbers, traders may be having second thoughts about whether the US is at full employment, too. The dollar was down 0.9% against the yen at the time of writing, and yields on 10-year treasury notes touched their lowest level since November, as investors sought haven assets.

This wobble might not be serious enough to stop the Fed hiking interest rates this month, but the US economy certainly doesn’t appear as strong as record-high stock markets and other indicators would lead you to believe. According to the Economic Policy Institute, a think tank, it is “abundantly clear” the US hasn’t yet reached full employment.


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