The Most Important Number of the Week Is 559,000
(Bloomberg Opinion) -- When it comes to judging the performance of the economy, it’s not enough to rely on the facts alone. More important is how to interpret the facts. For example, it’s a fact that the U.S. economy added 559,000 jobs in May, falling short of the 675,000 median estimate of economists and missing by an even further margin the so-called whisper number of 800,000.
So, the Commerce Department report can be interpreted as a disappointment, right? Wrong. The right way to think about the data is that it compares very favorably with the average of 193,000 jobs per month that the economy was adding in the five years before the pandemic. In fact, the only time employment growth was better in the pre-Covid era was way back in September 1983, when the economy added 1.12 million jobs.
Here’s another exercise: It’s also a fact that average hourly wages grew 0.5% in May from the prior month, well above both the 0.2% median estimate of economists surveyed by Bloomberg and the longer-term pre-pandemic average of the same amount. This is a clear sign that earnings are being pressured higher, a key driver of inflation, right? Well, not exactly.
The wage figure would be concerning if it was occurring at the higher end of the earnings spectrum. Instead, it came mostly in the low-paying leisure and hospitality sector, which added 292,000 jobs last month, accounting for a little over half of overall employment growth. Barings LLC Chief Global Strategist Christopher Smart summed it up well in a note to clients on Friday:
On the one hand, there is apparently huge demand for workers and plenty of anecdotal reports on rising wages. On the other hand, most of the jobs to be filled will be lower-wage jobs, which may act to keep average wages from rising too quickly. In any case, wages are unlikely to rise too fast. The global pressures from globalization and technology will keep wage demands from getting out of hand, as they have for the last several decades.
To be sure, the labor market is far from fully recovered. There are still about 7.63 million fewer people working now than before the pandemic. But the report should provide some comfort that the recovery is on track, even if it may take a little longer than hoped.
It also should also alleviate concern that the economy is overheating and reduce the chance that the Federal Reserve will pull back on its stimulus sooner and harder than expected, as my Bloomberg Opinion colleague Brian Chappatta wrote after the release of the data.
Those two conclusions are evident in the reaction of financial markets. Equities surged on Friday, led higher by the biggest gain in tech stocks in more than two weeks. That fact that tech stocks led the way is important because that sector had been under pressure in recent months amid concern that signs of faster inflation would push market interest rates much higher, making their lofty valuations harder to justify.
Over in the bond market, yields on longer-term U.S. Treasuries fell in a sign that traders have less concern about inflation rates rising too rapidly. Also, breakeven rates on five-year Treasury notes, a measure of what traders expect the rate of inflation to be over the life of the securities, fell to 2.56%, their lowest since April based on closing prices.
The prospect of lower rates for longer weighed on the greenback, keeping the Bloomberg Dollar Spot Index near its weakest levels since early 2018. This is a good thing, as it will help boost the competitiveness of U.S. exporters as the global economy recovers.
It’s a fact that jobs growth fell short of economists’ forecasts for two consecutive months. But don’t interpret it as a disappointment. The markets aren’t, and neither should you.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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