KEY DATA: ADP: 27,000; Construction: -36,000; Small Businesses: -52,000/ ISM (Non-Man.): +1.4 points: Orders: +0.5 point/ HWOL: -2.3%

IN A NUTSHELL:  “April’s employment surge may have been an aberration as May is looking a lot softer.”

WHAT IT MEANS:  When the April jobs report showed that 263,000 new positions were created, I warned that this might be just one of those temporary blips that we get in the data and that May’s number could be a lot weaker.  Well, we will know for sure on Friday, but the ADP estimate of private sector job gains seems to point to that being the case.  Businesses added few new workers in May and the details were pretty gruesome.  Small business payrolls shrank dramatically.  It’s not just that smaller companies cannot compete on wages in a tight labor market but the changing structure of retail demand is putting a lot of them out of business.  That said, there was only a minimal gain in mid-sized company payrolls, so not a lot of firms are finding it easy to hire.  There was also a huge drop in construction workers, but that came after a strong gain in April. 

Supporting the possibility of a disappointing May jobs report was a solid decline in the Conference Board’s Help Wanted Online Index.  Every region and almost every state posted lower online ads for workers.  Similarly, reductions were seen in almost every occupation category, so you can say this was an economy-wide issue. 

While the job market seemed to falter in May, the nonmanufacturing portion of the economy continued to do okay.  The Institute for Supply Management reported its index rose as new order growth accelerated. Business activity in the service and construction segments of the economy improved quite solidly.  Unlike the other surveys released today, the ISM employment index rose.  The in the non-manufacturing segment, however, stands in contrast to the May manufacturing report, which declined, led by a sharp shrinkage in order books.  That does not bode well for future production.

MARKETS AND FED POLICY IMPLICATIONS: All eyes are on trade discussions, but the tariffs and threats of additional tariffs may already be starting to have an impact on growth.  I don’t expect the jobs report to come in at double digits, but a low triple-digit May jobs number is a real possibility.  That would bring the average for the three months close to expectations and show that the April number was foolish.  But given the equity markets’ sensitivity to any weak number, it could create an outsized impact.  Investors are counting on the Fed to bail out the economy but they are fooling themselves.  The Fed has limited ammunition to fight a slowdown.  Let’s face it, if the Fed has to go below one percent again, it will be in trouble.  The only reason to go that low is if the economy is in deep trouble and not a lot of businesses will be making major capital spending decisions or households buying big-ticket items under those circumstances.  Interest rate cuts would have limited impacts.  The Fed has a little more than one percentage point of rate cuts before it effectively runs out of ammunition. It would need a lot more than that to turn around a faltering economy.  And with the U.S. budget deficit nearing one trillion dollars, fiscal policy is in a straight jacket.  So we better hope that a major slowdown doesn’t occur anytime soon or to quote George H.W. Bush, we will be in “deep doodoo”.