Top of the Morning: May Jobs Report takeaways

Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

For today, we will check in on the health of the U.S. labor market following the release of the May jobs report just about one hour ago. Joining me here for today's conversation, glad to welcome back from the UBS Chief Investment Office, Senior U.S. Economist Andrew Dubinsky.

With that, Andrew, thank you for dropping by on this jobs Friday morning. Great to be back with you here on Top of the Morning. Yeah, yeah.

It's great to be back with you. And this report definitely was quite a bit stronger than what we were expecting and obviously what the consensus was expecting. You had job growth accelerate up to 172,000.

And you can see that there were some key contributions for a couple sectors like leisure and government explaining over 100,000 of those gains. But even stripping back some of those sectors, it was a pretty broad-based. The report had a lot of gains across many industries.

And we looked at something called the diffusion index to show that. So, broad gains, pretty large positive revisions to the prior months and that lifted the three-month moving average up to around 180,000. And that's a pretty strong trend.

And so, when you look at these numbers, it's going to definitely assuage some concerns that people coming into this report probably still have about the labor market. I think the other thing that we're looking at always very closely is wage growth. And that actually continued to slow.

So, I'd say from a policymaker's perspective, you're seeing pretty strong job growth, but you're not seeing much inflation pressures. And so, I think that's a key factor for why the case for hikes, even with the stronger job data, is not going to be strengthening and getting that much support amongst the policymakers. The other indicator that's obviously very important for policymakers is the unemployment rate on an unrounded basis.

It stayed the same, but on looking at the next few decimal points, you did actually see it declined. And the important thing about this decline is that it was driven by employment gains. So, this is, again, the household survey where they're asking people about their employment situation versus the business survey.

And what happened here is you saw that more people reported that they were employed. And sometimes the unemployment rate can go down for good reasons. In the case of more employment, sometimes it can go down for bad reasons, a lower participation rate.

In this case, it went down for good reasons. So, that's another reason that concerns about the labor market, at least in the near term, probably get reduced and definitely also reduces the case for cutting in the near term. With that, Andrew, after assessing this latest batch of jobs data, how would you characterize the overall health of the U.S. labor market?

From hearing your remarks there, it sounds like some concerns about the health of the labor market were perhaps a bit alleviated following this release. Yeah, I would agree with that, Dan. I think, you know, what did we get from this report?

We've got a lot of information about the unemployment rate and, you know, breadth across industries. And then stepping back, you know, earlier this week, we got some job openings data. And that suggested that we're, you know, there was an improvement in the openings in the government data.

But, you know, looking across the data, I would say there's also a stabilization in openings. So, that certainly helps, you know, hiring in the near to, you know, meeting term. So, I think you're right.

We definitely reduced some of the concerns about, you know, unemployment, I would say. The other thing that really hasn't changed, unfortunately, for consumers is people are just aren't getting a ton of income from their jobs. So, we're still seeing, you know, growth slide.

And in this elevated inflation environment, you're not generating a lot of real income growth. So, it definitely puts a, I'd say, a ceiling on consumption, which has been running over 2%. So, it's a job market that's stable, but not necessarily giving you a lot of money to spend relative to what you have been spending.

So, if we put aside the labor market for a few moments, looking at other areas of the economy, Andrew, outside of today's jobs report, what are some other recent and or perhaps upcoming macro data points of interest on your radar? Yeah, I'd say the most important thing to watch out for is next week's CPI report. So, this report could mark the peak in headline inflation, bringing it up to over 4% year over year.

Why could it be the peak? Well, we are seeing retail gas prices stabilizing or declining a little bit recently. And of course, we pay a lot of attention to the core inflation data.

On a monthly basis, that's expected to be a bit better for some technical reasons. Last month's report combined about two months of housing or shelter inflation into one. So, this month for May should be a bit more normal.

And we're expecting to see more moderation in tariff effects on goods. So, that's something we're watching very closely. And so, we're expecting inflation in the second half to really decelerate with less energy price effects, at least in the headline, and a big deceleration in the contribution from tariffs.

So, we're going to look at that data next week and see if that view plays out. Okay. Well, with that, Andrew, thank you for dropping by top of the morning on this Friday morning to keep our listeners, our clients informed on the state of the U.S. economy.

We focused in more specifically today on the labor market following the release of the May jobs numbers. Thank you again, Andrew, for dropping by and we will speak again soon. Thank you.

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