Why hiring surged in May despite economic strain from the Iran war

Geoff Bennett:

There was surprising strength in the latest jobs report. Employers added 172,000 jobs last month, the third straight month of gains, 93,000 more jobs were added in March and April than previously estimated, and the unemployment rate stayed at 4.3 percent.

Amna Nawaz:

Overall, the labor market appears strong, despite concerns about the war in Iran, rising prices and artificial intelligence.

Kevin Hassett, the director of the White House National Economic Council, celebrated two straight months of job growth over 170,000.

Kevin Hassett, Director, National Economic Council:

What we're seeing is an enormous amount of positive momentum in hiring. Obviously. You're right, a couple 170s in a row, that's a great couple of months, but then having upper revisions of around 100,000 means that this is a job market that's hitting on all cylinders.

Amna Nawaz:

For more, we're joined by Diane Swonk, chief economist at KPMG. That's a multinational accounting and advisory firm.

So, Diane, this was an unexpectedly positive jobs report. How big a deal is this?

Diane Swonk, Chief Economist, KPMG:

Well, one of the biggest upside surprises was in local government hiring, which increased over 50,000.

So that was where a lot of the upside surprise was. But, of course, we did see those upward revisions as well. Almost all the job gains that we saw were concentrated in the service sector.

And I think it's important to look at what's under the hood, is, even as good as those numbers looked, we still saw very elevated numbers of what we call the underemployed, those having to take part-time, instead of full-time work or discouraged workers. And the duration of unemployment continued to rise.

Amna Nawaz:

And those largest gains, as you mentioned, in leisure and hospitality, help us understand what's fueling that.

Diane Swonk:

Well, what we're seeing is, the top third of wage earners are seeing their wages pick up much more than inflation. And they're spending it, along with the upcoming World Cup and preparations for that in host cities. That has caused the biggest hiring in that sector since January of 2023 in the month of May.

The problem is, that's adding heat to already sticky service sector inflation. And the problem is that most Americans, the bottom two-thirds of the income strata, they're seeing their wages erode and fall below the level of inflation. We're expecting to see inflation above 4.2 percent next week when the CPI for May comes out.

And that erosion in purchasing power is sort of where you see the disconnect between how consumers feel about the economy, because they feel as though they're losing ground, even though a minority of consumers are carrying spending gains and actually contributing to that service sector inflation.

Amna Nawaz:

I want to ask you more about that wage growth in just a moment too. But, again, big picture here, those 172000 jobs, that beat the prediction of most economists, including yourself. You predicted about 110,000. You described the labor market as frozen or in purgatory.

You weren't alone in that assessment. So does all of this say to you there's been an unfreezing here?

Diane Swonk:

There is some thaw, but there still is that undercurrent that I mentioned. And that is something that I worry about.

The quit rate at the end of April from the job opening and labor turnover survey, which we watch very carefully, that actually fell to its lowest level since August of 2020 in late April. We just got that data out this week as well. And that tells us that basically workers are worried about quitting their job.

And we know that the premium to hop jobs also narrowed in the month of May. So that means their opportunities to leave the job they have are less than they once were and at a very low rate. So we're still in this -- we're seeing a higher hire rate than we have. And that's great. And we're not seeing a big fire rate. That's also important.

But there is this sense where those who have a job are clinging on and those who want a job are still trying to get their foot in the door. The kinds of jobs we're generating are not lowering the unemployment rate for new college grads, which is running at levels that are more consistent with the early 2010s than coming out of the pandemic.

Amna Nawaz:

So, Diane, there's a big question here about what all this means for interest rates, right? We're watching closely as the president's picked to lead the Federal Reserve -- that's Kevin Warsh -- is in the early weeks at the helm of the Fed. They meet again in about two weeks.

We know Warsh has been under pressure by the president to lower interest rates. Based on all the data and evidence we see now, what do you think will happen when it comes to those interest rates?

Diane Swonk:

Well, we have been arguing for some time that the Fed would have to hike, not lower rates again, and that has now become the consensus within the leadership of the Fed before Kevin Warsh joined.

And I think that's very important. We have heard some presidents even talk about the need for a rate hike soon, rather than later, and I think that's important. So what we're coming into is financial markets waking up to the fact that inflation is the most regressive of taxes out there. It spurs inequality.

And you cannot sustain or attain full employment and have a more healing labor market, where all boats rise with the tide, unless you derail inflation. That's why it's so critical that the Federal Reserve derails the inflation that has become entrenched and compounded over the course of five years, making the level of prices too high for far too many.

Amna Nawaz:

And, Diane, I have a couple of seconds left, but I have to ask you.

There's a lot of concern after President Trump fired the head of the Bureau of Labor Statistics about whether or not numbers could be trusted moving forward. Is there any reason to doubt the data that we have seen today?

Diane Swonk:

The data is as good as it can be at this point in time, and I think that's the important thing. These are bureaucrats. They have worked on this data for a long time.

I will note, though, we have -- the level of employment in the federal sector is now at its lowest level since 1966. And due to the firings and retirements and quits that we saw last year, we have lost 350,000 workers in the federal agencies since October 2024. That has left staffing shortages, which makes it harder to do the quality that we want from the statistical agencies.

Amna Nawaz:

That is Diane Swonk, chief economist at KPMG.

Thank you so much, Diane. Good to talk to you.

Diane Swonk:

Thank you.