Are the Glory Days of Job Growth Over?
- The May jobs report was more gory than glory.
- Expectations for a June rate hike plunged; but is July still on the table?
- Although there are other confirming reports as it relates to weak jobs, there are others suggesting the economy is okay.
It was more like a gory day for job growth in May. And if there is one thing that’s clear about last Friday’s dismal employment report its that the Federal Reserve sees the data at the same time as the rest of us mere mortals. How else would you explain the recent breathless chattering from every variety of FOMC (Federal Open Mouth Committee) member about another imminent rate hike? Never mind…at least this month. The July FOMC (it really stands for Federal Open Market Committee) meeting may still be considered on the table, but unless job growth accelerates from here, it’s more likely to be pushed to September.
Fed Chair Janet Yellen is set to give a speech today in Philadelphia—after this report will be published. It’s likely she kept her speech writers working over the weekend, making adjustments after Friday’s jobs report. In addition, after the job report’s release last Friday, Lael Brainard, a voting Federal Reserve Governor, gave a very dovish speech at the Council of Foreign Relations, warning against raising rates too quickly.
Lest you were blissfully unaware of the report, here are the relatively gory details. Payroll growth was a measly 38k, significantly below the 160k consensus. The miss was five standard deviations away from the mean economist estimate, according to Bespoke Investment Group (BIG). Even if you add back in the loss from the Verizon strike, the number would have still been a sub-par 73k. Adding salt to the wound was the 59k subtracted from the prior two months’ readings on job growth. The six-month average (to smooth out some of the natural month-to-month volatility) of payroll growth can be seen in the chart below.
Source: Department of Labor, FactSet, as of May 31, 2016.
Hours worked slowed to just 1.6% year-over-year, although average hourly earnings (AHE) were up 0.2% for the month (2.5% year-over-year). Wage growth appears to be a budding bright spot within the data. A final disturbing sub-item was the number of people working part-time for economic reasons—a favorite indicator of Fed Chair Janet Yellen—which soared by 468k, the most since September 2012 (see chart below).
Source: FactSet, Federal Reserve Bank of St. Louis, as of May 31, 2016.
At first blush, the drop in the unemployment rate (seen in the first chart below) from 5% to 4.7% would seem to be cheer-worthy; however, it was largely due to a drop in the labor force participation rate (seen in the second chart below). The household survey employment measure (from which the unemployment rate is calculated) was also weak, showing a gain of only 26k.
Source: Department of Labor, FactSet, as of May 31, 2016.
It was undoubtedly a weak jobs report and bears watching to see if a trend is becoming entrenched. However, keep in mind that this data can be highly volatile and that it’s important to look for other confirming—or denying—data on the overall state of the jobs market. Payroll growth hasn’t deteriorated yet to the degree typically seen heading into recessions, but the trend is troubling and bears watching.
A key data point released last week which confirmed the weakening in payrolls was the ISM Non-Manufacturing (services) Survey, which was weaker-than-expected. (Caveat: the ISM Manufacturing Survey was better-than-expected). Also, small business confidence as measured by the National Federation of Independent Business (NFIB), has taken it on the chin over the past 18 months, as you can see in the chart below. On this front though, there is also a denying indicator within the NFIB survey: it continues to show strong hiring intentions by its members.
Source: FactSet, National Federation of Independent Business (NFIB), as of April 30, 2016.
My personal view is that there are two under-appreciated contributors to this drop in confidence, in addition to the weak economy: the presidential election and its implications, and Fed policy itself. As for the former, it is easy to surmise that an election in which voters are being asked to choose between the two most unpopular candidates in election history may be a confidence-denter. As for the latter, many of us as Schwab—including Chuck Schwab himself—believe the excess easy monetary policy of the Fed’s may be hurting the economy (via the confidence channels) more than helping it.
Greg Ip had an interesting article in this past weekend’s TheWall Street Journal on the subject. He quotes Jason Thomas of the Carlyle Group who believes companies are being encouraged by exceptionally low rates to buy back stock or pay dividends vs. investing longer-term in their businesses.
Two key economic data points supporting the view that the May jobs report was an aberration (or has unique explanations) are initial unemployment claims and the Job Openings and Labor Turnover Survey (JOLTS); seen in the two charts below.
Source: Department of Labor, FactSet, as of May 27, 2016
Source: Department of Labor, FactSet, as of March 31, 2016.
A recent 42-year low in initial unemployment claims and record job openings belie the weakness in job growth last month. Consumer confidence has also remained healthy; with the Conference Board’s monthly survey of showing the percentage of respondents saying jobs are plentiful remaining near a cyclical high of more than 24%. What may be at work is a yawning skills gap between all of those unfilled jobs and available workers.
Perhaps the simplest of benign explanations for the slowdown in job growth is the maturity of the cycle. Inevitably in every economic cycle, employment eventually approaches full maturity—we may be closer to that point than many have believed. It’s also possible the productivity gap is beginning to narrow; which could mean U.S. gross domestic product (GDP) continues to plod along; but real wages picking up more sharply and employment growth slowing further.
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