Job growth in the US surged unexpectedly last month, continuing to defy predictions of a slowdown and raising questions about when interest rates might be reduced. Employers added 272,000 jobs in May, significantly surpassing the anticipated 185,000, according to the US Labor Department.
This stronger-than-expected job growth occurred despite the highest borrowing costs seen in over two decades. Many analysts had expected these high rates to slow the economy. Since 2022, the US central bank has aggressively increased interest rates to combat inflation, reflecting the rate at which prices are rising. The Federal Reserve has pointed to robust employment numbers as evidence that the economy can withstand the current interest rates.
These new job figures challenge other indicators suggesting a slowdown, making the case against cutting borrowing costs soon. "Today's data indicates that the Fed will likely delay any rate cuts," said Richard Carter, head of fixed interest research at Quilter Cheviot. He suggested that any reduction this year might now be unlikely.
While the European Central Bank and Bank of Canada have recently cut rates, the Federal Reserve in the US remains cautious. It seeks more definitive signs that high borrowing costs are effectively slowing the economy and easing price pressures.
In the US, inflation has significantly decreased since 2022 but has recently plateaued. The latest data shows inflation at 3.4% in April, above the Fed’s 2% target. Analysts have noted that wage increases could further complicate efforts to curb inflation. The Labor Department reported a 0.4% rise in average hourly pay from April to May, with a 4.1% increase over the past year, exceeding the expected 3.9%.
While these wage gains are positive for workers, they could lead the Fed to reconsider lowering borrowing costs. The central bank aims to balance controlling inflation with the risk that prolonged high interest rates could stifle economic growth. "This report suggests the Fed will maintain current rates for several more months," said Ian Shepherdson of Pantheon Macroeconomics, although he still anticipates potential rate cuts later in the year if economic conditions change.
Despite the unexpected job growth, some indicators show potential economic softening. The jobless rate slightly increased to 4% in May from 3.9% in April, and the economy grew at an annual rate of just 1.3% in the first quarter, a slowdown from previous quarters. However, the robust job gains in May have alleviated fears of an imminent economic downturn.
The Fed will remain vigilant about inflation risks rather than immediate economic slowdowns," said Paul Ashworth, chief North America economist at Capital Economics.