Implications:  The headline payroll number beat consensus expectations slightly, but the totality of today’s report on the labor market shows a mixed bag.  Nonfarm payrolls grew 139,000 in May versus a consensus expected 126,000.  However, payrolls were revised down an unusually large 95,000 for the prior two months, leaving the net gain, including revisions, at a tepid 44,000. We like to follow payrolls excluding three sectors: government, education & health services, and leisure & hospitality, all of which are heavily influenced by government spending and regulation (that includes COVID lockdowns and re-openings for leisure & hospitality).  This measure of “core payrolls” increased only 5,000 in May and is up only a grand total of 26,000 in the past three months.  Meanwhile, civilian employment, an alternative measure of jobs that includes small-business start-ups (but is volatile on a month-to-month basis) dropped 696,000 in May.  Given that decline, why did the unemployment rate remain unchanged at 4.2%?  Because the labor force (people who are either working or looking for work), fell 625,000.  In the past four months the labor force is down 234,000, but with the native-born labor force up while the foreign-born labor force is down, a potential sign of the new Administration’s efforts against illegal immigrants.  Another sign of the new Administration is that excluding postal workers and census-related jobs, federal payrolls declined by 16,000 in May, the largest drop for any month in the past twenty years.  Compared to January, this measure of federal jobs is down 47,000, the largest four-month drop since the 1990s.   Long-term, reducing the size of government should help create more jobs in the private sector.  The best news for workers in May was that average hourly earnings rose 0.4% and are up 3.9% from a year ago.  Unfortunately, this may help the Federal Reserve justify postponing any rate cuts until later this year.  In the meantime, the share of unemployed workers who voluntarily left (or “quit”) their prior job dropped to 9.8% in May, the lowest level in four years and much lower than the 13.2% that prevailed in January.  The greater reluctance to leave a job without another job lined up suggests more anxiety on the part of workers about the near-term future.  We think that anxiety is warranted in spite of what is likely to be a strong second quarter for real GDP growth.  The (slight) fall of output in the first quarter and then the surge in Q2 is due to tariff policy, not a real bust-boom cycle.

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