KEY DATA: Payrolls: +38,000; Revisions: -59,000; Private Sector: 25,000; Unemployment Rate: 4.7% (down from 5%); Wages: +0.2%/ ISM (Non-Man.): -2.8 points/ Deficit: +$1.9 billion
IN A NUTSHELL: “Take a deep breath, breathe slowly and don’t panic – yet.”
WHAT IT MEANS: Huh? Has the economy really stopped creating jobs? Looking at the headline employment number, you get the impression that hiring came to a screeching halt in May. The increase was the smallest in 5½ years. The Verizon strike reduced the gain, but even adding those workers back, the number was still disappointing. Worse, the March and April increases were revised downward, which usually is a sign of slowing employment gains. The details weren’t much better. Only health care and government added lots of new workers. Manufacturing shed employees like crazy and the energy-sector continues to crater. There was also a sharp reduction in temp workers. Firms may be looking for permanent employees because of shortages, but normally, the need for temps rises in a strong labor market.
On the unemployment front, the rate fell significantly, to the lowest level since November 2007. However, the labor force also contracted sharply and the participation rate declined. Thus, it is likely the rate might tick up in June. Also, wage gains remained decent, which provides some belief that the labor market is tighter than the jobs number would imply.
Supporting the view that the economy may be slowing, especially job creation, was the Institute for Supply Management’s May Non-Manufacturing survey. Growth in the service sector slowed in May. New orders, including both imports and exports, moderated, activity eased back and backlogs stopped growing. That led to a contraction in employment gains, which is precisely what we saw in the jobs report.
What is likely to be today’s tree falling in the forest report was the release of the April trade numbers. The trade deficit widened, but by less than expected. The April deficit is well below the average for the first quarter and that could mean trade might surprisingly add to rather than subtract from growth this quarter. It was nice to see that both imports and exports were up.
MARKETS AND FED POLICY IMPLICATIONS: Yesterday I mentioned that the May jobs report could surprise either on the upside or the downside, but I didn’t expect this big a surprise. But the data in both the unemployment and payroll portion of the report were so outsized that you have to simply step back and ask: What is going on here? Is this an aberration or a signal that the economy is slowing? The surveys on job gains, except for ADPs, have not pointed to a strong job market. However, I am leaning toward it being an aberration since consumers are still buying homes, motor vehicles and just about everything else. If consumption expands by my expected 3% and trade actually adds to growth, we could wind up with a 2nd quarter GDP number near 3%. That would argue the May jobs numbers do not represent the true state of the economy. Of course, it would also imply a sharp rise in productivity, which would be very hard to explain. Regardless, a Fed rate hike on June 15th looks to be off the table. That doesn’t mean a July move is also history. We do get the June payroll numbers before then and while the second quarter GDP number will not come out until after the July 26-27 meeting ends, the FOMC should have a good idea what it will look like. A rebound in employment gains and a solid GDP number would support the Fed to nudging rates up again. But the Fed claims to be data driven, so we need to see those numbers first. As for the markets, while investors may not want the Fed to tighten, they also don’t want to see the economy tank. So this report shouldn’t bring smiles to anyone’s face, as it only adds to the confusion about when the next rate hike will occur and the strength of the economy.