The US jobs market remains strong, but there are signs that a welcome moderation, which should help cool off inflation pressures, is in the making.

The Labor Department reported on Friday that the United States economy added 390,000 jobs in May, which followed an increase of 436,000 jobs in April. The unemployment rate held steady at 3.6%.

While the rise in nonfarm payroll employment for May was stronger than many economists had predicted, the trend tells a more nuanced story.

“The jobs report confirmed the picture that has been emerging in recent months: Job growth is moderating to a slower but healthier pace, and wage growth is following in tow,” says Preston Caldwell, chief US economist at Morningstar. “Slower job growth doesn't mean the recovery is over, but instead that the recovery is shifting to a more supportable pace, helping to keep the economy from overheating."

Caldwell points to the three-month rolling average of job gains, which smooths out the month-to-month noise. Back in February, the three-month rolling average stood at a lofty 602,000. It’s now 408,000.

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“Growth in nonfarm payrolls has averaged 400,000 jobs over the past three months, a slower rate than at the start of the year. Given that wage growth has also slowed, it appears that demand for labor has cooled off a bit. This accords with our expectation that job growth will eventually decelerate to 100,000-200,000 per month in the second half of this year,” says Caldwell.

The slower pace of wage increases showed up in a 0.3% increase in average hourly earnings for May—the same pace in April, but down substantially from where wage gains were clocking in during 2021 and the early part of this year. Over the past 12 months, average hourly earnings have increased by 5.2%, according to the Labor Department.

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“Wage growth has averaged 0.4% over the past three months, or a 4.5% annualized pace,” says Caldwell. “This is getting close to about a 3.5% pace, which is consistent with the Fed's 2% inflation target. But it's far too soon for the Fed to declare victory, especially with the ongoing inflationary hit from Russia and other factors.”

Within the details of the jobs report, the Labor Department noted that hiring gains were concentrated among leisure and hospitality industries—among the groups hardest hit by the pandemic—in professional and business services, and in transportation and warehousing. Retail employment declined.

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Despite hints of moderation, there remain plenty of signs that the job market remains strong. The unemployment rate, for example, has held at 3.6% for three straight months. By historical standards, that is an extremely low level of unemployment.

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Caldwell also points to the Bureau of Labor Statistics job openings and labor turnover survey, widely known as the JOLTS report, where job vacancy rates remain near all-time highs.

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“Some supplementary data still shows that labor markets exhibit near-record levels of tightness,” says Caldwell. “In particular, the job vacancy rate has been hovering around 7% in recent months, up from 4.5% before the start of the pandemic.”

“But if employers were dead set on filling these vacancies at any cost, we'd be seeing faster wage growth than we are currently,” he says. “As such, we're less worried about the vacancy rate than some others.”

When it comes to the outlook for Federal Reserve policy, the job market is a central focus owing to those worries about wage pressures feeding high inflation.

“Today's report doesn't change the Fed's near-term course of aggressive rate hikes,” says Caldwell. The Fed is expected to increase the federal-funds rate by half a percentage point in June from its current level of 0.75%, and another half a percentage point in July. Bond futures markets expect that rate to be roughly 3% by the end of the year.

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