Robust job growth in May and upward revisions to employment in March and April have defied consensus expectations but likely elevated short-term expectations that the Fed will approve more rate hikes in order to combat further labor market resilience.

U.S. employers added 339,000 jobs in May, and the unemployment rate rose by 0.3 percentage point to 3.7%, the U.S. Bureau of Labor Statistics (BLS) reported Friday. The consensus expectation for May was 180,000, nearly 160,000 fewer jobs than were actually reported for the month.

The stronger-than-expected labor market growth over the last three months shows strength and resilience among employers, despite the economic backdrop of high inflation, soaring interest rates, persistent recession fears, and recent banking turmoil.

Revised estimates for the prior two months show that the U.S. economy added 217,000 total nonfarm jobs in March (+52,000) and 294,000 in April (+41,000), a net increase of 93,000 jobs, according to Friday’s employment situation report for May.

“The labor market remains disconcertingly strong,” said PNC Chief Economist Gus Faucher in an email to The Dallas Express. “The April jobs report indicated a moderation in job growth. But … the very strong May report, including big upward revisions to job growth in March and April, changes the picture.”

With such big swings from month to month, Faucher notes the difficulty of determining what exactly drives the current job market. “The big job losses in the household survey for May add an additional note of uncertainty,” he added.

The household survey is one of two sample-based estimates of employment produced by BLS (the other being the establishment survey). The household survey tracks the month-over-month change in categories like labor force participation rate, the number of unemployed persons, and the rate of unemployment.

The number of unemployed persons rose by 440,000 to 6.1 million in May, and the unemployment rate rose to 3.7%, the highest rate since October 2022, BLS said in Friday’s report.

The U.S. unemployment rate has hovered within the 3.4% to 3.7% range since March 2022, with April’s 3.4% rate matching the lowest unemployment rate since 1969.

In terms of employee wages, average hourly earnings inched higher by 0.3% to $33.44 in May after increasing 0.4% the previous month. Over the past 12 months, wage growth slowed to 4.3% in May from 4.4% in April.

“This is unwelcome news for the Federal Reserve, which would like to see job growth slow to a more sustainable pace,” Faucher told The Dallas Express.

The U.S. Central Bank has raised the target range for the federal funds rate at each of the last 10 Federal Open Market Committee (FOMC) meetings, with the rate currently at between 5% and 5.25%. While the Fed has made some progress in bringing down inflation from the June 2022 high of 9.1%, the last headline reading of 5% in May is still well above the Fed’s 2% target.

Last month, Dallas Federal Reserve President Lorie Logan suggested the likelihood of an eleventh rate hike at the upcoming FOMC meeting on June 14-15, citing labor market conditions and inflation data as the reason.

“After raising the target range for the federal fund rate at each of the last 10 FOMC meetings, we have made some progress,” Logan said last month in prepared remarks to the Texas Bankers Association in San Antonio. “The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.”

Faucher echoed sentiments that the Fed would likely maintain a close watch.

“But the overall takeaway from the May report is that job growth is running well above the economy’s long-run potential, and inflationary pressures are only easing slightly, despite aggressive Federal Reserve interest rate hikes since early 2022 in an attempt to cool off economic growth and the labor market,” Faucher wrote.

“The strong May report makes it more likely that the Federal Open Market Committee will raise their policy rate — the fed funds rate — by 25 basis points at its next meeting on June 14,” he said.  “Yesterday the futures market was pricing in only a 20% probability of an increase in the fed funds rate at that meeting, but that probability jumped to 30% after this morning’s jobs report.”

The CME FedWatch Tool places the probability of a 25-point rate hike at 29.9% as of Friday at 2:30 p.m. CT, up from 20.4% the day before.