U.S. unemployment rate is surging – Details

The rising tide of unemployment in the U.S. has raised eyebrows in economic circles, as a seven-month high of 3.7% in May suggests that labor market conditions are easing.

This development could potentially allow the Federal Reserve a reprieve from initiating an interest rate hike this month.

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Delving into the factors behind the surge

The uptick from a 53-year low of 3.4% in April, as reported by the Labor Department, can largely be attributed to an increase in black unemployment. It also appears that the labor force has seen an influx of new entrants, effectively relieving businesses of the pressure to hike wages.

Wage growth took a breather last month, a development likely to reassure Fed officials who are attempting to rein in inflation back to the U.S. central bank’s 2% target.

Despite the manufacturing sector and the housing market displaying sensitivity to interest rate fluctuations, the employment report presented convincing evidence that the economy is sidestepping a feared recession.

Sal Guatieri, a senior economist at BMO Capital Markets in Toronto, reflected on the report, noting that U.S. businesses continue to hire proactively to cater to robust consumer demand.

However, he also pointed out that softer areas in the report could signify the labor market losing momentum, thus providing the Fed with justification to postpone rate hikes in their upcoming meeting.

The nuances of U.S. job creation

The nonfarm payroll, as determined by the survey of establishments, exhibited an impressive growth of 339,000 jobs in the previous month. This growth outstripped the economists’ forecast, which predicted a rise of 190,000 jobs.

Furthermore, job creation in March and April exceeded earlier estimates by 93,000. For the U.S. economy to keep pace with the growth of the working-age population, it needs to create between 70,000 and 100,000 jobs per month.

Despite substantial layoffs in the tech sector, fallout from the COVID-19 pandemic, and the negative influence of higher borrowing costs on housing and manufacturing, the services sector is demonstrating resilience.

Sectors such as healthcare and education are playing catch-up, as businesses struggled to find workers over the last two years.

The labor market is also adjusting to fill the gaps left by accelerated retirements. The increasing demand for services, coupled with pent-up demand for workers, has underlined the Labor Department’s data showing 10.1 million job openings at the end of April, with 1.8 vacancies available for every unemployed person.

In particular, key sectors contributed significantly to job creation last month. Professional and business services welcomed 64,000 jobs, with temporary help rebounding and serving as a promising omen for future hiring.

Government employment swelled by 56,000, albeit still 209,000 jobs short of pre-pandemic levels.

Healthcare saw the addition of 52,000 jobs, particularly in ambulatory services and hospitals. Meanwhile, leisure and hospitality payrolls were boosted by 48,000, thanks to restaurants and bars. Despite this progress, employment in this industry still lags 349,000 behind its pre-pandemic level.

Overall, despite a decrease in manufacturing payrolls and only modest job gains in sectors such as mining, quarrying, oil and gas extraction, and financial activities, economists anticipate the continued growth of overall payrolls at least through year-end.

Given this projection and the current state of the job market, the months to come will prove crucial for shaping the trajectory of the U.S. labor market.

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