Strong employment growth in May indicates the U.S. economy is awakening from the soft first quarter and reaffirming the likelihood of an interest rate hike this year. A series of temporary factors, including slumping energy prices, a shutdown at West Coast ports, and cold weather combined to pare an annualized 0.7 percent from GDP in the first quarter, calling into question the veracity of the economic recovery. Additionally, weakness in the Eurozone and Asian economies supported the FOMC’s dovish stance. However, a bevy of recent economic releases, including May’s job additions, automobile sales and manufacturing data are indicative of an economy mirroring last year’s weak start and subsequent robust gains.
The U.S. economy created 280,000 jobs in May, the highest level since December of last year. Furthermore, an additional 32,000 positions were added to the prior two months, lifting average monthly gains thus far in 2015 to over 200,000 jobs. The professional and business services, leisure and hospitality, and education and health services sectors contributed 194,000 jobs during the month. Mining, meanwhile, pared 17,200 positions due to the prolonged downturn in energy prices.
The unemployment rate ticked up 10 basis points to 5.5 percent in May, though the increase can be attributed to college graduates entering the market. More than 100,000 unemployed workers were new entrants into the workforce, resulting in the modest rise in the rate. Annual wage growth, which the Fed has repeatedly used as leverage for leaving interest rates near zero, climbed to 2.3 percent in May, the largest rise in nearly two years.
Nearly 12 million jobs have been created since the recovery began, or 3.7 million more jobs than the country lost during the most recent recession. Combined with improved wage growth, the Fed is expected to begin normalizing monetary policy in the second half of this year. Although a slim chance remains that interest rates could rise in July, the most likely scenario points towards an increase in September or October.