3 key takeaways from the May U.S. jobs report
On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Senior Client Investment Analyst Chris Kyle discussed the May U.S. employment report, recent purchasing managers' index (PMI) surveys from around the globe and the outlook for equity markets through the rest of the year.
U.S. adds 559,000 jobs as unemployment rate ticks below 6%
On 4 June, the U.S. Bureau of Labor Statistics reported that the nation added 559,000 jobs during the month of May, Ristuben said, with the unemployment rate dipping to 5.8%. "Job gains in May roughly doubled what was seen in April, when the U.S. added 271,000 new nonfarm payrolls," he noted. In almost any other time, the May report would have been viewed as wildly positive, Ristuben said - but not in the era of COVID-19, where over 7 million American jobs lost during the early months of the pandemic have yet to return.
The May numbers fell short of consensus expectations for 650,000-plus new jobs, he stated, adding that the error rate on monthly job estimates over the last six months has been tremendously high. "There's been a lot of month-to-month volatility in U.S. job growth due to the uneven pace of the recovery, and because the numbers are generally quite large to begin with," Ristuben explained.
One of the biggest positive takeaways from the report came from the leisure and hospitality industry, he noted, with restaurants and bars adding 186,000 jobs last month alone. "That's a sign that life in the U.S. is returning closer to pre-pandemic norms, as restrictions are lifted and more and more Americans begin dining out again," Ristuben remarked.
He noted that inflation pressures also cropped up in the May report, with average hourly earnings rising by about 0.5% on a monthly basis. "That's a pretty big increase, and something to keep an eye on," Ristuben said. However, he stressed that with the unemployment rate still significantly above pre-pandemic levels, there's still a fair amount of slack in the labor market. "This is one of the factors that I believe will help keep inflation in check through 2022," Ristuben stated.
The engines of commerce are firing: Global growth takes off in May
Recently released manufacturing PMI surveys from May in France, Germany, the UK and China all point to record growth in the sector, Ristuben said. "While these lofty numbers aren't surprising, it's definitely gratifying to see that the very, very high expectations for growth are starting to verify worldwide," he stated, noting that consensus expectations are for 5% annual growth in GDP (gross domestic product) in Europe, and 7% in the U.S.
Ristuben said that the growth in eurozone manufacturing last month was particularly impressive, with IHS Markit's PMI for the region hitting a record high of 63.1 in May - beating the previous high of 62.9 set just one month earlier. A reading above 50 indicates expansionary conditions, while a reading below 50 indicates contractionary conditions. Improvement was also noted in Europe's services sector, Ristuben added, with IHS Markit's eurozone services PMI climbing to 55.2. "Due to the initially slower rollout of vaccines in Europe, the region's services sector has been lagging a bit behind the even-more explosive growth noted in the U.S., but the latest data shows it's really starting to come alive more," he stated.
Ristuben also stressed that the rapid boom in growth across both sectors is not just limited to Europe, the U.S. and China. As evidence, he pointed to the just-released J.P.Morgan Global Composite PMI for May, which hit a level of 58.4 - its highest reading in 15 years. "Ultimately, this shows that the engines of commerce are really beginning to fire across the board," he remarked.
Market outlook: Will equities continue moving higher?
Turning to equity markets, Ristuben noted that most major indices have racked up four straight months of positive returns - which he said is often the case during the really early stages of the market cycle. "The early part of the business cycle generally serves as a powerful support mechanism for equities," he observed.
That said, stocks certainly aren't cheap - particularly in the U.S., which Ristuben said is one reason why investors shouldn't be euphoric. Overall, though, he expects markets to continue moving upward in 2021, perhaps achieving an equity risk premium of around 4%. However, Ristuben said that the potential for a market correction does exist - as it does every year, given that approximately 60% of calendar years experience a 10% pullback in equities.
"It's important to note that trying to predict when this could happen is very, very difficult - and ultimately, this early in the business cycle, I have a hard time seeing a scenario where a 10% dip in equities actually holds for any length of time," he concluded.