US labor sector is expected to see a solid job growth and lower unemployment in May but focus will be on earnings

All eyes are today’s release of US jobs report for May which is going to give more details about the situation in the labor sector, but also to provide more clues of the sector’s performance in conditions of soaring inflation, labor shortage and a record creation of new jobs.

According to forecasts, the US economy created 325,000 new jobs in May, compared to 428,000 increase in April, while unemployment is expected to ease to 3.5% from 3.6% in April, but these figures are likely going to be overshadowed by the earnings data, since the US Federal Reserve shifted from its initial focus on employment to the price stability.

The strong rise in consumer prices in past several months has prompted the policymakers to fully focus on bringing soaring inflation under control and put their initial target of full employment as one of key requirements to start tightening policy, in the second place.

The inflation was boosted not only by rising energy prices, but surging costs of a broad basket of goods that lifted the Core Personal Consumer Expenditure, one of key gauges of inflation, two and a half times above the target, putting households and the economy overall under increased pressure, leaving not much space to the central bank to maneuver, but to act quickly in raising interest rates.

Markets will closely watch the figures of Average Hourly Earnings, which have likely risen by 0.4% in May, compared to 0.3% increase previous month, with any divergence from the expected level to impact the market action.

The most likely scenario is for earnings rise above expectations, as US employers struggle to find workers, on deepening gap between job offer/demand and are willing to pay more to attract workers, despite that higher pays will provide fresh boost to the inflation.
The most recent data showed that the activity in US manufacturing sector is accelerating that adds to employers’ aims to increase wages to staff the companies.

The US dollar is likely to benefit from this scenario.

At the opposite side is the scenario of wages decreasing in May, which would signal that inflation is peaking and employers decide to react accordingly, while the Fed is likely to stick to its plan to raise interest rates by 0.5% in policy meetings in June and July, but further action will be uncertain that would bring the greenback under pressure.

The least likely scenario is for unchanged figure in May that would make the dollar nervous, moving initially higher, but probably changing direction later.

Overall, the expectations signal that the US labor market remains tight on solid job growth and unemployment returning to the pre-pandemic levels, despite tightening financial conditions and hawkish Fed’s stance fueling fears of a recession next year.