The U.S. economy added 138,000 jobs in May, far less than expected with downward revisions for prior months. The unemployment fell to a 16-year low of 4.3%, the Labor Department reported on Friday, as fewer people searched for work. The data don't change expectations for the Federal Reserve to raise interest rates in on June 14, but markets no longer expect a subsequent hike in 2017.
Wall Street economists expected a 190,000 payroll gain and a steady 4.4% jobless rate.
Average hourly wages rose a tame 2.5% from a year ago vs. expectations of a 2.6% annual rise.
March and April payroll gains were revised down by a combined 65,000. The average job gain over the past three months is a lukewarm 121,000.
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After some back-and-forth, markets eventually took the soft job numbers in stride, closing at fresh record highs. Immediately after the report, futures for the Dow Jones industrial average, the S&P 500 index and Nasdaq composite pared gains on the stock market today. The Dow, S&P 500 and Nasdaq all hit all-time highs when the market opened, then erased their intraday gains, before rallying again later. Still, the 10-year Treasury yield sank to 2.15%, near a postelection low.
Shares of Dow Jones industrial average component JPMorgan Chase (JPM) finished 0.5% lower, and Bank of America (BAC) lost 0.8%, but both ended well above the day's lows. Financial stocks such as JPMorgan have been under pressure for a variety of reasons, including flattening yield curves and tempered expectations for Fed rate hikes amid modest wage gains and declining inflation. That's happened even as the the falling jobless rate has indicated that labor market slack is disappearing, a typical precursor to rising wages.
Ahead of the jobs report, incoming evidence from corporate earnings calls and business surveys, including the Fed's Beige Book out on Wednesday, have pointed to rising wage pressures and a tightening labor market. Companies like Jack in the Box (JACK), AutoZone (AZO) and Union Pacific (UNP) are among companies reporting accelerating wage pressures in recent months, while American Airlines (AAL) and JPMorgan implemented broad pay hikes.
One possible takeaway from the jobs report is that companies have slowed hiring because they're having trouble finding qualified workers. Modest-wage employers that are facing wage pressures are searching high and low for productivity gains, which may be holding back job growth. An example is Wendy's (WEN), which has rolled out self-serve kiosks to 1,000 restaurants.
So why isn't wage growth showing up in the Labor Department data? One possibility highlighted by Ian Shepherdson of Pantheon Macroeconomics is that wage gains are almost always under-reported in months when the 15th of the month falls after the BLS survey week, as happened in May. If that's the case, expect outsized wage gains in next month's report. The rise in payrolls may have undershot for the same reason, and he expects "a big rebound in June."
Even if job gains haven't been understated, the 3-month average of 121,000 monthly job gains is generally higher than Fed estimates of trend labor force growth, meaning it will tend to lead toward a tighter market.
Still, the Fed will feel less need to raise rates proactively if the job market has indeed downshifted.
Another contributor for modest wage gains may be related to demographics, with data pointing to much faster wage gains among young adults and prime-age workers, but workers 55 and up seeing slow gains even as they account for a rising share of the workforce.
IBD'S TAKE: A flattening of the spread between short and long Treasury yields is just one of the things that have turned banks from stars of the Trump postelection rally into stock market laggards, but evidence of a pick-up in wage growth could shift the new economic consensus and give the sector a lift.
The jobless rate has sunk a half-point from 4.8% in January, as the ranks of the unemployed have tumbled by 774,000, the monthly survey of households shows. Over the same period, the number of people with jobs is up 842,000. Meanwhile, the workforce has grown by just 68,000, while the number of adults outside the labor force is up by 617,000.
The takeaway from corporate earnings calls doesn't paint the same picture of lackluster wage gains, but it's possible that companies are stepping up productivity initiatives amid a tighter labor market.
Jack in the Box says it's seeing 6% wage inflation, driven in part by minimum-wage increases. CEO Leonard Comma said the restaurant operator has had to yield on its historic 99-cent taco price and he expects other fast-food chains that draw customers with heavy discounting to eventually move in the same direction. Once commodity prices stabilize, Comma said on a May 13 earnings call, "it's going to be very difficult for franchisees to make money on this level of discounting," according to a Seeking Alpha transcript.
Carrols Restaurant Group (TAST), the largest franchisee for the Restaurant Brands International (QSR) Burger King chain, also has been seeing 6% wage inflation, up from the 3% to 5% range it anticipated back in November. While New York's minimum-wage hike is a big part of the story, "a lot of this has been driven by the tightness in the labor force in most markets," Carrols CFO Paul Flanders said on a May 8 earnings call.
AutoZone CEO Bill Rhodes noted "accelerated pressures on wages," with minimum-wage increases playing a secondary role. "Probably the larger portion is being driven by general market pressures with lower unemployment and some specific actions taken in recent years by other retailers," Rhodes said on a May 22 call.
Railroad operator Union Pacific said on an April 27 call that it's seeing wage inflation of 5%, up from 2.5% in the fourth quarter and 2% for all of 2016.
The National Federation of Independent Business' survey of its members found that 34% reported job openings last month, the highest level since 2001, while 18% reported plans to hire, the strongest reading since 2006.
But 51% of small firms said they found few, if any, qualified workers and 12% relied on temporary workers, up 2 points from April.
"The really good news is that small firms want to hire, and they are trying hard to create more jobs. The bad news is that they're having a very hard time finding qualified workers," said NFIB Chief Economist Bill Dunkelberg. "That's forcing them to increase compensation to stay competitive and hire temporary workers, but they are still having a difficult time increasing prices to absorb the additional costs."
A U.S. Bank survey of small businesses in its 25-state territory found that 61% of owners were having either "extreme or moderate difficulty finding quality employees to expand their business."
The Fed's Beige Book noted that "labor markets continued to tighten, with most Districts citing shortages across a broadening range of occupations and regions."
It noted that "many firms reported offering higher wages to attract workers where shortages were most severe," such as a Chicago-area manufacturing firm "attracting better applicants and improving retention for its unskilled workforce by raising wages 10%."
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