May Employment Report

KEY DATA: Payrolls: +75,000; Private: 90,000; Revisions: -75,000; Unemployment Rate: 3.6% (Unchanged); Wages: +0.2%

IN A NUTSHELL:  “The lean, mean job machine has sand in its gears.”

WHAT IT MEANS: Welcome to the real world.  All those firms saying they couldn’t find qualified workers may have been true statements not fake news as job gains faltered in May.  And, the huge increase we thought we had in April now looks less robust while the solid March hiring turns out to have been only mediocre.  The three-month average job increase now sits at 151,000, which is reasonable given the labor market conditions.  In May, the data were remarkable in that there were no major outliers.  Retailers cut workers, but not at any huge pace.  Manufacturers and construction added workers at the expected modest rate.  Health care and professional service companies hired moderately and restaurants continued to add workers at a typical pace.  Government employment did drop, but that came after an even larger rise in April, so nothing surprising there either.  In other words, there were no usual unusual numbers that I love to pick on. 

As for the unemployment rate, it was unchanged as both the labor force and the number of employed rose at a moderate pace.  All good there.  The labor force participation rate was stable and the so-called “real” unemployment rate declined. 

If there was one weakness in the report, it was the wage data.  Hourly wages were up moderately but the growth rate over the year year continues to decelerate.  After peaking in February, it has been a steady downward path and that is not good for workers or the economy.MARKETS AND FED POLICY IMPLICATIONS: Over time, the economic data wind up matching what is reasonable given the economic conditions, and that is finally happening with the employment numbers.  Going into the year, most economists expected job gains to be in the 150,000 to 175,000 range, given the low unemployment rate and demographics.  Guess what: That is where we are.  The idea that we could add over 200,000 employees a month was unrealistic and reality is hitting home.  With the labor market so tight, the pace of increase is still quite decent.  It’s just that it isn’t anywhere near where the politicians hoped it would be.  There are some signs that the market may be faltering more than perceived.  This was the second month out of the past four that job gains were below 100,000.  In addition, the data are being revised downward, which means that the models are expecting job gains from the smaller to mid-sized businesses to be stronger than what we are seeing.  That matches the ADP results, which showed that small business hiring ground to a halt and mid-sized firm added workers modestly.  They just cannot compete with the larger companies who can pay up for workers and either they do without or they face rapidly rising wage costs.  For small firms, that is usually a disaster. And maybe the most disconcerting numbers of all came from the wage data.  Despite tight labor markets, wage gains continue to decelerate.  The combination of more modest payroll and compensation increases does not bode well for income growth or consumption.Investors cannot be happy with this report.  It warns of moderating growth ahead as more modest job gains are starting to become a trend.  As for the Fed, this is actually a good report.The economy is not falling off a cliff: It is just easing back.  Thus, there is no reason to cut rates. Wage inflation remains muted and that means that price inflation is not likely to surge unless the tariffs are put on all Chinese and Mexican products.  There is no reason to raise rates.  Patience can and is likely to rule!  The next meeting is June 18-19 and that is what is likely to be the stance, though the Fed will likely reiterate that it stands ready to support growth if conditions tank.  Right now, that is not happening, despite this one weak employment report.