U.S. jobs gains of 390,000 in May and still strong wage growth leave the Federal Reserve on track for half-point interest rate increases in June and July as the U.S. economy continued to show little evidence it is buckling under the pressure of high inflation and rising interest rates.

The May job gains, coupled with revisions in the March and April data, mean the economy continued to add about 400,000 jobs monthly even as the Fed began to tighten monetary policy in March, equity markets sank, and fears of a recession rose.

Yet that pace of job growth is below the 569,000 jobs added monthly from January 2021 to February of this year, a slowing that many economists have anticipated – and which the Fed has reason to welcome – given the current low unemployment rate, which remained steady in May at 3.6%.

President Joe Biden, who is concerned about the fallout from high inflation, welcomed the new data as a sign the economy was holding up while still easing towards what is hoped to be a more sustainable pace of job growth.

“We aren’t likely to see the kind of blockbuster job reports month after month like we had over this past year. But that’s a good thing. That’s a sign of a healthy economy,” Biden said.

Many economists expected an even sharper slowdown, as tech firms announced layoffs or hiring freezes amid diving company stock prices, and on the assumption that consumers would begin scaling back given high inflation and rising food and energy bills.

“Payroll growth settled into a lower gear this spring but talk of an imminent recession is nothing more than fearmongering,” wrote EY-Parthenon Chief Economist Gregory Daco, noting that the United States is now less than 1 million jobs short of the peak level for non-farm payrolls hit just before the onset of the coronavirus pandemic. “Anecdotal evidence of hiring freezes and layoffs at tech companies is misleading with overall job openings still near record-highs and layoffs at record-lows.”

The annual pace of wage growth slowed slightly, and the labor force grew by an additional 330,000 workers, both developments that Fed policymakers hope will continue.

In the context of inflation that is running triple the Fed’s 2% target, however, it was at best a halting sign of moderation at a time when policymakers say they are likely to continue with a string of half point rate increases until there is convincing evidence price and wage dynamics are slowing.

Fed Vice Chair Lael Brainard on Thursday said it was “very hard to see” a case for pausing rate hikes in September, though policymakers may opt to slow the pace of hikes to a quarter point per meeting if inflation begins to ease.

“We’ve still got a lot of work to do to get inflation down to our 2% target,” said Brainard, whose views hold sway as a core member of the Fed’s leadership.

The pace of annual growth in average hourly earnings has fallen now for three months running from 5.6% in March to 5.2% in May, but even that is higher than Fed officials would feel is consistent with a 2% inflation rate, plus some additional increase to account for productivity gains.

“It will take a slowdown…to closer to 4% before the Fed can claim it is making significant progress,” said Michael Pearce, senior U.S. economist at Capital Economics.

The May jobs report is one of the last high-profile data points Fed officials will carry into the upcoming meeting of the Federal Open Market Committee on June 14-15.

There is a strong consensus at this point to raise the target federal funds rate by half a percentage point, to a range of between 1.25% and 1.5%.

Absent a major shock, policymakers are anticipated to approve another half percentage point increase in July.

But the May jobs report, fresh statistics on consumer prices to be released next Friday, and other upcoming economic data will shape debate over what happens next.

The behavior of the U.S. job market is central to the Fed’s hope to steer the economy out of a current bout of high inflation without a significant increase in the unemployment rate.

The latest available data on job openings showed about two open positions for everyone estimated to be out of work and looking for a job, a figure Fed officials feel needs to decline to bring wage increases in line with their 2% inflation target. Hiring in May continued across industries, with some industries now pressing well beyond their pre-pandemic employment levels, and even leisure and hospitality firms climbing steadily back as spending shifts towards travel, entertainment, and other in-person services.

Data from time management firm UKG has shown hourly work activity slowing for 10 of the last 11 weeks, with individual worker data suggesting some of that came as stressed shift workers got relief from the overtime demands of last year, said UKG Vice President Dave Gilbertson.

It was the sort of developing trend, he said, that could produce what the Fed says it wants – a gradual cooling of the labor market that begins to cut into the massive number of job vacancies without causing large layoffs.

“We are not seeing a wild drop-off. We are seeing a slight drop-off each of the last three months…If companies are having hourly workers work just a few fewer shifts each of the past three months, that adds up to be something like the early stage of a soft landing in the labor markets,” he said.

Copyright 2022 Thomson/Reuters