U.S. May Job Report Leaves Timing Of QE Tapering Open‏

The May job report showed 175,000 in job gains in May, and a small downward revision leaves the three-month average at 155,000. This is consistent with some slowing in GDP growth in Q2, but is still OK.

This is not weak enough to put QE tapering in September off the table and not strong enough to confirm it - hence it remains up to incoming data.

Initial jobless claims so far suggest that job growth slowed slightly into June, which at the current juncture leaves September a bit early.

Data could still change in the coming weeks, and we remain fundamentally optimistic on the U.S. recovery. For now, we stick to our 50/50 chance of September/December for QE tapering.

Details
Non-farm payrolls increased by 175,000 in May and private payrolls rose 178,000, not far from expectations. Net revisions were a negative 12,000 and three-month average job growth moderated to 155,000 from above 200,000 in April.

It is the private service sector that is driving labour market's current upswing. Over the past three months, this sector has added 163,000 jobs on average. In comparison, the goods-producing sector has on average not added a single job over the same period. In May, manufacturing employment declined by 8,000, which is actually better than the employment component in the ISM survey had suggested and the construction sector added 7,000 jobs. The private service sector added 179,000, and the government sector shed a modest 3,000.

The unemployment rate surprised on the upside as it rose to 7.6% from 7.5%. However, this hides much stronger details. Household employment actually gained a substantial 319,000, but 420,000 persons entered the labour force, pushing the unemployment rate higher.

Weekly hours were flat on the month, but were revised one notch higher in April to 34.5. Average weekly hours are thus in line with the level during the previous expansion. Wages were flat on the month and wage growth is now at a modest 1%, annualized on a three-month average. Our payrolls income proxy has lost momentum, but still suggests income growth of 4% (3M AR) due to the rise in aggregate hours worked.

Outlook and assessment
The May employment report keeps QE tapering in September on the agenda, but is not strong enough to confirm it – hence it remains up to incoming data. Initial jobless claims so far suggest that job growth slowed slightly into June, but data could still change in coming weeks. We remain fundamentally optimistic on the U.S. recovery, and for now stick to our 50/50 chance of September/December for the start of QE tapering.

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