U.S. May payrolls gains higher than expected

(Reuters) - U.S. job growth accelerated in May and the unemployment rate dropped to an 18-year low of 3.8 percent, pointing to rapidly tightening labor market conditions, which could stir concerns about inflation.

STORY: TABLE:

KEY POINTS:

* Total payrolls rose 223,000 vs 188,000 estimate and downwardly revised 159,000 prior (original 164,000)* Private payrolls rose 218,000 vs 183,000 estimate and downwardly revised 162,000 prior (original 168,000)

* Unemployment rate unchanged at 3.8 pct vs 3.9 pct estimate and prior

* Average hourly earnings rise 0.3 pct month-to-month vs 0.2 pct estimate and 0.1 pct prior

* Average hourly earnings rise 2.7 pct year-over-year vs 2.7 pct estimate and 2.6 pct prior

* U-6 rate pct falls to 7.6 pct vs 7.8 pct prior* Labor force participation falls to 62.7 pct from 62.8 pct

* Household survey: Workforce up 12,000; employed up 293,000; unemployed down 281,000

COMMENTS:

TOM PORCELLI, CHIEF U.S. ECONOMIST, RBC CAPITAL MARKETS, NEW YORK:

“It’s a good report all around, it literally checks off all the right boxes. We’ve just been quickly scouring through to see where the negatives are, because inevitably there are some negative things about a report, and honestly there’s not. Whether it’s the strong gain in gobs, the unemployment rate fell and fell for the right reasons ... average hourly earnings were up, the diffusion index was up. It literally doesn’t get any better than what we witnessed in this report.”

“The Fed didn’t need a report nearly this strong for them to have continued on course, a report like this is sort of icing on the cake. The hurdle for the Fed is a lot lower than what the report gave us today. We’ve always been thinking four hikes (this year), and from our perspective we don’t need a number like this to get to the Fed to get to four, but I think numbers like this might encourage people to reconsider the idea of four full hikes this year.”

LARRY HATHEWAY, GAM INVESTMENTS’ CHIEF ECONOMIST, ZURICH:

“The two numbers people will focus on is fact unemployment rate dipped and average hourly earnings rose 0.3 percent which is a little faster than expected.”

“It’s the kind of report more hawkish members of the Fed will see as validation for what they’re doing. It seems to cement that they’ll raise rates a quarter point in June.”

“The disappointing thing is labor force participation rates. People were hoping that number would show a more convincing sign of rising.”

“It’s been meandering in that range for a while. There’s no real sign here the slow rate of unemployment and wage growth is inducing people back into the labor force.”

“It speaks to the idea the economy is fully employed and there’s not a lot a lot of slack in the labor force.”

“It’s a pretty subdued reaction. The numbers were broadly within the ranges of expected values.”

“The market had already nearly fully discounted the June rate hike and mostly for Septembert. The only one that’s really in debate is December and we’ve a lot of news between now and then.”

MICHAEL ARONE, CHIEF INVESTMENT STRATEGIST, STATE STREET GLOBAL ADVISORS, BOSTON:

“The job numbers are very strong, widespread, or broad based, that was an indication of strength from the report. The really good news for markets is the average hourly earnings continues to be very steady and does not signal a buildup in inflationary pressures, so overall a very solid report.

“I expect the Fed to raise rates in June, this report would kind of affirm that view that we are on track for the Fed to raise rates in June and continue on that path. We haven’t seen a big reaction yet from the futures, similarly on Treasuries, meaning rates rose a little bit post-announcement, so that affirms the idea the Fed is likely to go ahead and raise rates in a few weeks in June.”

DAVID JOY, CHIEF MARKET STRATEGIST, AMERIPRISE FINANCIAL, BOSTON:

“It’s a pretty robust series of numbers. Obviously, a lot of jobs were created in the month of May, plus nice revisions, so overall, the labor market looks pretty strong. You also saw a nice bump in average hourly earnings, so that suggests the economy is quite firm here and keeps the Fed on track for a rate hike in the next couple of weeks and maybe even keeps alive the thought there’s a possibility of a fourth rate hike down the road - but we’ll worry about that in the second half. But this looks like a very strong number across the board.”

ANTHONY SAGLIMBENE, GLOBAL MARKET STRATEGIST, AMERIPRISE FINANCIAL SERVICES, TROY, MICHIGAN:

“The markets have built in this assumption the Fed is going to raise rates three times this year, that’s worked into the expectations. In terms of the employment report, markets are just looking for confirmation that that expectation for the Fed is still valid.

“Today’s number probably doesn’t change the Fed’s path in any meaningful way. The average hourly earnings number was a little hotter than expected. When you look at a year-over-year rate of 2.6—2.7 it’s implying that inflation is rising modestly, which means for the market the Fed doesn’t have to raise rates more than expected.

“Markets are going to react positively to this number because there’s nothing in it that suggests the Fed has to move more aggressively.”