A Sign of the Times: "Now Hiring"


By Michael Englund and Rick MacDonald The labor-market recovery continued to gather steam in May. The employment report for the month, released June 4, showed better-than-expected growth in nonfarm payrolls of 248,000 -- higher than the consensus estimate of 220,000, which was also our forecast at Action Economics.

The upside surprises weren't limited to May. For the second straight month, not only did the payroll numbers come in higher than the market expected but previous data were also revised higher. March's figures were revised upward by 16,000 jobs, to 353,000, and April's by 58,000, to 346,000. Overall, the combination of May's robust increase and the March and April revisions has lifted payrolls to a level nearly 100,000 higher than expected.

WORKING LONGER. The May report puts the final nail in the coffin of the jobless recovery and provides additional ammunition for the Federal Reserve to hike rates at its June and August policy meetings. We now assume that the central bank will indeed tighten the Fed funds rate target by 25 basis points (one-quarter of a percentage point) at its June policy meeting and another 25 basis points in August -- with some possibility that the Fed will move by a full 50 basis points in June if conditions appear to demand it.

Among other key components of the jobs report, the unemployment rate held steady at 5.6%, matching the consensus forecast. Average hourly workweek came in at 33.8 hours, also meeting consensus projections, vs. an upwardly revised 33.8 hours in April. Hourly earnings rose 0.3%, slightly outpacing the consensus call of 0.2%. Overall, the May report implies a strong round of economic data later this month.

Perhaps the most impressive news were the upward revisions in the workweek for March and April, alongside strength in May. Note that a swing of 0.1 hours in the workweek in any month is the hours-worked equivalent of 300,000 jobs, and the March and April data were both revised up a tick. The adjusted workweek data now round to a solid 33.8 hours in every month of the year. Growth in total hours worked looks to accelerate to roughly 3.7% for the second quarter, from a 2.3% pace in the first, which provides solid support for our estimate of 6.3% gross domestic product growth for the second quarter.

INDUSTRIAL STRENGTH. Strength was widespread across the major employment sectors for the third straight month. (The one notable exception was government, which shed 27,000 jobs.) Manufacturing, in particular, came in well above Street forecasts, with a gain of 32,000 jobs on the month, vs. the consensus projection of 20,000. This followed gains of 29,000 in April, 23,000 in March, and 7,000 in February.

This recent positive string follows 42 consecutive months of declines. We would note that given the substantial upward adjustments to April and March, May could be revised even higher over the next couple of months.

Overall, strong domestic demand, depleted inventories, and solid export growth (helped by the relatively cheap dollar) appear to be contributing to the best environment for manufacturers in several years. The robust May numbers suggest ongoing strength in other factory reports to be released later in the month -- especially industrial production. That indicator is now poised for a healthy 1.2% surge in May, given a surge in the factory workweek in May to 41.1 hours, from 40.7, a rise in overtime hours to 4.7, from 4.6, and the 32,000 jump in factory payrolls.

INCOME BOOST? Industrial production is steadily accelerating from its cyclical low in the 2003 second quarter. Since then, it grew 3.8% in the third quarter, 5.6% in the fourth, 6.3% in the 2004 first quarter, and now is projected to rise 8% in the current period. And nothing appears to be on the horizon to restrain the sector's growth any time soon, given the broad strength in the factory employment and workweek data, alongside other supportive indicators.

U.S. personal income is now poised for a solid 0.6% increase in May, given the month's healthy payrolls and workweek data, alongside the big 0.3% wage gain in May. Disposable income has surged over the past year in response to tax legislation and grew a hefty 8.1% in the first quarter of this year. With Apr. 15 having come and gone, this rate is likely to slow to around 6% in May, but the labor market's solid trajectory implies that these numbers may now hold sustainable strength, with or without tax stimulus.

In total, the May jobs data indicate that the month's remaining reports are all likely to reveal extraordinary strength in factory activity, widespread growth in income and spending, and continued gains for the high-profile construction sector.

The upshot: Little evidence suggests a pause in U.S. growth any time soon. The employment data indicate that the economy is in the midst of a solid and broad-based surge that will make it difficult for Alan Greenspan to drag his feet regarding a "measured" pace of Fed tightening. In the eyes of most economists, the employment groundswell now makes interest rate setters appear "behind the curve" -- and that's not the image that Greenspan & Co. like to portray. Englund is chief economist and MacDonald director of investment research and analysis for Action Economics


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