What to Make of May’s Job Flowers

America’s jobs growth “trounced” expectations in May, and the “eye-popping” figure seemed to leave pundits in a daze given the weird conclusions we saw out there. Our take? The latest jobs numbers suggest long-running, well-known trends persisted last month—don’t read much more into a backward-looking, frequently revised dataset. 

Give May its flowers: Nonfarm payrolls rose by 272,000, shattering expectations for 180,000, and wage growth accelerated to 4.1% y/y from April’s 4.0%, beating consensus estimates of 3.9%.^[i] It wasn’t a sweep of positivity—the unemployment rate ticked up from April’s 3.9% to 4.0% (hitting the 4% threshold for the first time in two years), but it is a small uptick, and it isn’t unusual for the Household and Establishment Survey to send mixed signals.^[ii]

There weren’t many negatives to glean from May’s report, though it did spur some odd reactions. Many cling to one aspect or another and try to interpret future Fed policy in light of it—always a fallacy, in our view. But others strangely concluded the strong numbers meant the economy is “approaching a ‘soft landing,’ meaning it is neither running to hot inflation nor veering toward a recession.”^[iii] At the risk of sounding nitpicky, that description sounds more like a Goldilocks economy to us—i.e., the data aren’t “too hot” or “too cold,” but “just right.” Moreover, a soft landing implies the economy is slowly coming down to Earth. But what is actually landing here? Hiring picked up!

We like a nice jobs report, and it is great to see firms hiring and wages rising. Don’t overstate the meaning, though, especially since the data are subject to numerous updates. The monthly jobs report includes revisions to the prior two months’ nonfarm payrolls, as the BLS incorporates both information received after the initial estimate and other updates (e.g., recalculated seasonal adjustments). Alongside May’s headline figures, the BLS revised April and March’s numbers down, to 165,000 (from 175,000) and 310,000 (from 315,000), respectively.

Revisions can keep coming long after the fact. The BLS’s Q4 2023 Quarterly Census of Employment and Wages (QCEW) found payrolls grew by an average of 60,000 less per month last year—not a huge change to the 2023 jobs picture, but still weaker than initially thought.^[iv] The QCEW tracks a larger swath of the US labor market (12 million establishments, comprising 95% of jobs)—much more comprehensive than the monthly Establishment Survey’s coverage of 119,000 businesses and government agencies. That said, the QCEW also has blind spots. Since it uses unemployment insurance filings, it doesn’t include those who aren’t authorized to work (e.g., undocumented immigrants). The report is also extremely backward-looking. We are nearly halfway into 2024, yet the latest QCEW just provided a snapshot of last year’s jobs situation. Labor data are normally late-lagging economic indicators. This is ancient history.

That employers added 272,000 jobs net (pending revision) last month doesn’t say anything about what they will do through 2024’s close. Rather, last month’s hirings reflect companies’ decisions made in early 2024, if not late 2023 depending on a business’s hiring timeline.

Consider why a business adds to their workforce. Labor is an investment of time and capital, so companies will add workers only if there is a payoff—which is typically when they can’t keep up with customer demand. Economic growth creates jobs, not the other way around. Though pundits frequently use jobs to draw big conclusions about the economy, we think this gets it backwards: Jobs reiterate what the economy has done, adding to what other data already showed—see Q1 GDP, which showed ongoing expansion (even though headlines groused about the downward revision). And stocks—the ultimate leading economic indicator, as they move on the probable economic and earnings growth over the next 3 – 30 months—have long since priced in the economic growth May jobs confirmed.

In our view, that is the real takeaway. Not whatever this allegedly means for the Fed meeting. Not what it may imply about the economy’s course from here. Rather, that investors should resist the temptation to draw forward-looking investment implications from the jobs report. While labor market data look backward, markets are busy looking forward.