Payrolls delivered another huge upside surprise in May, with a blockbuster 339k increase pushing back on fears that a recession might be imminent.

Clouding this headline was a drop in employment in the household survey, and a rise in the unemployment rate to 3.7%. Historically this measure has been better at capturing turning points in the labour market.

Scratching beneath the surface, this divergence was driven by a large drop in self-employed workers and employees on unpaid leave. Absent these, the gap between the two surveys evaporates. 

Weak self-employment likely reflects a normalisation in the post-pandemic labour market. This makes us more confident the household survey is not yet signalling a weaker underlying labour market environment.

Elsewhere, the recovery in participation stalled. An ageing workforce and already high prime participation suggest there is limited scope for a further recovery in labour supply.

Average hourly earnings data were soft, and are not far from inflation target-consistent rates. But our preferred measures of wage inflation show a far less benign trend. 

Overall, the Fed will probably see today’s report as further evidence that the labour market remains robust, even if aspects were mixed.

These data won’t change the Fed’s plan to pause in June, but at the margin they support another hike.

 

 

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