KEY DATA: Jobs: +138,000; Private: +147,000; Revisions: -66,000; Unemployment Rate: 4.3% (down -0.1 percentage point); Wages: +0.2%/ Trade Deficit: $2.3 billion wider
IN A NUTSHELL: “The lack of workers and modest economic growth are holding back job gains.”
WHAT IT MEANS: This week, I warned that the payroll report could be well below expectations and it turns out that was indeed the case. Job gains In May were significantly below consensus and almost half what the closely followed ADP report estimated. Nevertheless, the report was not weak. Yes, there were some real issues we saw in the data. The brick and mortar retail sector is reeling from Internet competition and jobs are disappearing. The slowdown in vehicle sales has led to manufacturers cutting back payrolls. Meanwhile, construction, health care, finance and restaurants are still adding workers at a very solid pace. So far this year, the economy has created an average of 162,000 per month, which is more than enough to keep the unemployment rate falling. And, it is more than enough to allow the Fed to raise rates on June 14th.
On the unemployment front, the headline rate fell to the lowest level in sixteen years, while the really stupid unemployment rate hit its lowest level since November 2007, just before the Great Recession officially hit. In other words, no matter how you measure it, the labor market is tight. While the participation rate fell, it is still at the average over the last three years. Similarly, nothing should be read into the decline in the labor force since it had been surging at an unsustainable pace for several months. It is now growing at a more trend level. While the low level of available workers should be leading to higher wage gains, that was not the case in May. Average hourly earnings rose modestly – only 1.8% on an annualized basis.
The tree that fell in the forest today was the April trade deficit. It widened as exports fell but imports rose. That is not something we want to see. Even adjusting for inflation, it looks like trade could slow growth this quarter.
MARKETS AND FED POLICY IMPLICATIONS: I cannot to brag that I said this week that the employment number should be in the 140,000-range. I didn’t estimate that lower number because of some great model I developed. I made that estimate because the lack of qualified workers due to the low unemployment rate simply didn’t support the high job gains that had been previously reported. The reality is that the May payroll increase should simply be viewed as bringing us in line with firms should be adding given the overall state of the economy. With the downward revisions to March and April, we now are where we should be. Yes, the three-month average fell to 121,000 but the data have been hugely volatile lately, so let’s wait a while before saying hiring has slowed dramatically. The decelerating job gain trend is something investors and the Fed will watch as it could also be signaling a moderation in growth. Indeed, if the trade deficit does widen and vehicle sales stay as soft as they were in April and May, second quarter growth may not be snapping back as solidly as expected. But with investors essentially giving the Fed a free ride in two weeks, I would be surprised if the FOMC doesn’t move in two weeks.