Breakneck pace of U.S. job gains seen getting tougher to sustain

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(Bloomberg) – U.S. job growth in May vaulted payroll gains above 1 million in 2018, reaching the milestone a month earlier than in the past two years. Whether the labor market can maintain such a breakneck pace amid a diminishing pool of skilled workers is another question.

Employers added 223,000 jobs last month, more than forecast and bringing payroll gains for the year to 1.04 million, Labor Department figures showed Friday. The jobless rate fell to 3.8% to match April 2000 as the lowest since 1969, moving further below the 4.5% Federal Reserve officials see as sustainable in the long run. Average hourly earnings increased a larger-than-projected 2.7% from a year earlier.

The robust pace of hiring comes amid what employers frequently cite as a shortage of qualified, available workers to fill positions as demand accelerates, with a gauge of U.S. factory backlogs at a 14-year high. Some analysts said that while the report signals job growth may eventually ease, it also bodes well for worker pay -- the weak spot so far in an otherwise bright employment picture -- and poses a potential source of upward pressure on labor costs and inflation.

“Demand for labor remains pretty vigorous,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “Job growth is running in excess of the sustainable pace of the demographically-determined supply of labor. So far, it hasn’t shown up in wage or price inflation but there’s only so long the situation can sustain itself. The unemployment rate is well below almost anybody’s estimate of sustainable full employment.”

The actual data on Friday almost took a backseat to controversy sparked by President Donald Trump’s tweet an hour before the release that he was “looking forward to seeing” the figures. That led to market speculation that the report would be upbeat, and it was, though Trump’s comment broke with past practice of presidents who avoided addressing the jobs report prior to its release. Stocks and Treasury yields edged up before the report, then extended gains after the release.

For now, the strong labor market will keep powering economic growth, and the data reinforced expectations for Fed policy makers to raise interest rates when they meet June 12-13. It also spurred increased bets on two more hikes this year after that, rather than one, though trade disputes and weakness in some European economies pose risks to U.S. growth.

While lauding the employment figures, economists also wondered how far the strength in monthly payrolls gains can extend.

“The only question we have is: where is the U.S. finding so many workers?” Sal Guatieri, senior economist at BMO Capital Markets, wrote in a note, adding that his team is “much more comfortable with our view that the Fed will move each quarter until mid-2019, barring a further escalation in the trade war.”

“Still, labor shortages will eventually act as a brake on the expansion,” he said. BMO estimates the potential labor supply at about 2 million this year, or nearly 170,000 per month, and that assumes a slight upturn in participation. With payrolls exceeding 1 million in the first five months of the year, “something will have to give” -- a slower economy or higher inflation, he wrote.

Economists estimate that monthly payroll gains of around 100,000 are sufficient to keep pushing down the unemployment rate, which is derived from a separate Labor Department survey of households and is near levels considered consistent with at or below full employment.

What our economists say

The nonfarm payroll trend is weathering domestic politics, geopolitics and trade-tariff concerns with ease -- at least for now. While heightened volatility over the past few months has made the underlying hiring trend difficult to decipher, the 223k payroll gain in May provides important confirmation that labor momentum continues to build, and this is not simply reflecting the GDP snapback from a first-quarter lull.-- Carl Riccadonna and Niraj Shah, Bloomberg Economics Read more for the full reaction note from Bloomberg Economics.

The payroll gains in May were fairly broad-based, with construction adding 25,000 jobs and manufacturing adding 18,000. Service providers boosted employment by 171,000, led by increases in retail; education and health services; leisure and hospitality; and transportation and warehousing. Auto and parts makers and temporary help services recorded declines.

One blemish on Friday’s report: The participation rate, or share of working-age people in the labor force, decreased for a third month, to 62.7%. Among prime-age workers, or people 25 to 54 years old, it fell to 81.8% from 82%, as the rate for men declined and the rate for women held steady.

The participation rate remains a closely-watched measure for central bankers. While improving prospects for employment and wages are helping attract people who were on the sidelines of the job market, the retirements of older workers have been exerting downward pressure on participation.

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