Puny jobs report likely overstates hiring slowdown
Report probably takes June rate hike off the table
INSIGHT ARTICLE |
May’s hiring estimate of 38,000 new jobs likely overstated the slowing pace of employment growth in the U.S. labor market. This report strikes us as more noise than signal and we anticipate that employment growth will resume at a stronger pace, albeit one that is more in line with the six-month average of 170,000 new jobs per month than the 12-month average of 205,000 new jobs per month. For now, this report means the U.S. Federal Reserve will likely push back any plans to raise the federal funds rate before later this year, taking a summer rate increase off the table.
Once one corrects for the 35,000 striking workers at Verizon, the topline was 73,000 new jobs rather than the 38,000 which was estimated by the Bureau of Labor Statistics. Meanwhile, an unusual increase in workers who were unable to work due to bad weather points to ongoing problems in seasonal adjustments. In other words, this report deserves a giant asterisk above it and should be taken with a grain of salt.
Moreover, the weakness of the reports stands in contrast to our proprietary survey on middle market firms, which indicates strong hiring and compensation plans in both the current quarter and in the next six months. While we believe hiring has certainly slowed, upon deeper inspection this report looks like an outlier rather than an inflection point in hiring or the economy.
The decline in the unemployment rate to 4.7 percent is a function of a 458,000 decline in the labor force which, after year-over-year growth of about 2 million new entrants into the workforce, reinforces our analysis that the May report is simply capturing statistical payback versus a turning point in the jobs market.
Average hourly earnings increased by 0.2 percent to a year-ago change of 2.5 percent, which is in line with wage and salary increases noted in other economic reports. Wage increases are not rising at a symmetrical pace across the economy. Information workers, manufacturing workers, and those in the leisure and hospitality industries are all seeing rising wages, while those in education and healthcare are somewhat stagnant wages. To reinforce that point, aggregate hours increased at a 0.3 percent three-month average annualized pace, which will underscore a modest improvement in spending.
We remain concerned that policy changes regarding overtime pay, increases in the minimum wage and rising healthcare costs for firms that employ more than 50 people are beginning to have an impact on the hours available to workers. The recent increase of 468,000 in involuntary unemployment, after seven months of flattening out, may in fact be a response to policy shifts and rising political risk associated with the upcoming U.S. presidential election.