Our forecast for payroll employment is expected to rise by 190,000 for May, marking a pickup from weather-related shortfalls during April and March. Private payrolls are expected to rise by 185,000. A drop in payrolls in the government sector during April is expected to reverse in May. An unusual drop in employment at the state level and for the U.S. post office at the federal level offset gains in local government hiring; we expect that to reverse In May. Teacher strikes over pay ended up having little to no impact on the data for April and March because most strikes occurred outside of the survey week when establishment (employer) data is gathered.
Gains in the health care, manufacturing and construction sectors are expected to be strong. More importantly, wages in those sectors are expected to firm. Nurses are in short supply and now seeing wage gains as well as signing bonuses. Construction wages have already begun to rise; the manufacturing sector is expected to regain some traction for May. Manufacturing wages slowed in April as hiring shifted to lower wage manufacturing jobs.
Hours worked and overtime are expected to rise in May. Double shifts are becoming particularly common in the leisure and hospitality sector where employers are complaining that it is getting harder to find workers. Anyone walking into a restaurant in a tourist destination during the Memorial Day weekend already knows this. Deteriorating service and understaffing are some of the best indicators of a tightening labor market. One young women who waited on me was losing her voice as she tried to take all of the orders on her third day of double shifts. The labor shortages are so acute that the administration has temporarily increased the number of guest workers who can enter the country to fill low-wage summer jobs. We are seeing a similar shift in the allocation of guest workers to pick crops. The numbers simply are not enough to make up for worker shortages, most notably in the lowest wage jobs.
In response, we are expecting average hourly earnings to rise 0.3% in May, which would mark a slight acceleration in the year-over-year pace of wage gains. Overall wage gains remain relatively weak, however, considering the low level of unemployment and reports of labor shortages.
The Federal Reserve is comfortable with raising short-term interest rates in June, given the inflationary signs. The trajectory of rate hikes during the remainder of this year will depend heavily on wage gains. Average hourly earnings need to rise at a 3% sustained pace for the Fed to feel as comfortable about hikes in the second half. I think we will see that this summer, which will prompt additional rate hikes by the Fed in the Fall.
The unemployment rate is expected to hold at 3.9% for May. A key issue is whether more young people enter the labor market. The number of teens and young adults is expected to come back a bit this summer. The high cost of student debt will act as a pressure for some. The challenge will be to engage slightly older workers who have other hurdles including drug use and skills erosion.
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