Monday Update: Dismal Jobs Report Raises Concerns

Last week’s data was more mixed than in recent weeks, with a very weak employment report and worse-than-expected results in the service sector offsetting continued positive news on manufacturing and consumer income and spending. On balance, both the strong trends in consumer demand and the relative weakness in business continue, but the real concern going forward will be whether or not employment growth has truly weakened.

At the very least, the May jobs report likely introduces enough uncertainty to keep the Federal Reserve from raising rates in June.

A look at last week’s news

Consumers continuing to earn and spend. The personal income and spending report for April showed income growth in line with expectations at 0.4 percent, the same as last month—a strong number bolstered by continued wage growth. Spending growth was even better, surprising substantially to the upside with a 1-percent increase, up from the prior month’s flat result. Given this strong growth, even if spending is flat for the next two months (which doesn’t seem likely), quarterly growth could still be strong.

The positive income and spending numbers were inconsistent with the Conference Board's consumer confidence survey, which dropped from 94.2 to 92.6 in May, against expectations of an increase to 96. Much of the decrease came from current conditions, with future expectations dropping by much less, suggesting that higher gas prices hit current confidence. On an absolute basis, the confidence level remains healthy and consistent with continued growth, but the drop may suggest that underlying conditions are deteriorating.

Business surveys mixed. The ISM business surveys were also mixed, but in the opposite direction from what was expected. Rather than dropping slightly, the manufacturing survey rose from 50.8 to 51.3, taking it further into expansion territory. The increase came even though several regional manufacturing surveys had deteriorated since the last release. The stronger headline number notwithstanding, the underlying components were weak, with most of the increase attributable to a pickup in supplier deliveries.

The non-manufacturing survey, on the other hand, surprised to the downside, declining from 55.7 to 52.9, well below expectations of 55.3. Although this index remains firmly in expansion territory, it is now at the lowest level since early 2014. As with the manufacturing survey, the underlying details also showed weakness, with employment expectations in particular dropping sharply, which was consistent with the weak employment results.

Trade balance positive. The news on the trade balance was good, as expected. We already knew that the expected increase in imports has been much less than anticipated, and second-quarter export growth did exceed import growth, for a much smaller increase in the deficit than anticipated. The actual deficit was $37.4 billion, up slightly from the previous month at $35.5 billion but much better than expectations of $41 billion. This should help accelerate second-quarter growth for the economy as a whole.

Jobs report very disappointing. Unfortunately, the employment report was terrible. Expectations were for job growth at the same level as the previous month, at 160,000, with the unemployment rate declining slightly from 5 percent to 4.9 percent, hourly wage growth dropping to 0.2 percent from 0.3 percent, and hours worked remaining stable at 34.5, all of which would be reasonably healthy. But the actual numbers came in much lower:

• Jobs increased by only 38,000, far below the expected 160,000.
• To make matters worse, the prior month was revised down from 160,000 to 123,000.
• Manufacturing jobs dropped by 10,000, and private-sector jobs were up by just 25,000.
• Average weekly hours worked declined from the estimate for the prior month, to 34.4, and the prior month itself was revised downward to 34.4.

From a job-creation standpoint, this isn’t good—in fact, it’s the worst report in more than five years. Although there are reasons it's not quite as bad as it looks (notably, the necessary adjustments for the Verizon strike), this report is still a shocker. That said, it may be a one-time hit, not a signal of a substantial slowdown. With other employment stats generally very positive, this bad month may well be an outlier. On the other hand, the downward revisions to previous months do raise the risk that this represents a more significant shift in trend.

Though it’s certainly not time to panic, it is time to start paying attention. The next couple of months of jobs data will help us determine whether the economy has changed course for the worse. Certainly, unless the June jobs report comes in much better, the Fed is far less likely to raise rates next month and could even end up putting it off until at least September.

The week ahead

After last week’s fire hose of data, formal releases this week are limited to the University of Michigan’s consumer sentiment survey. Released on Friday, it is expected to remain essentially stable, with a minimal decline from 94.7 to 94.5.

Also worth paying attention to will be Janet Yellen’s speech today to the World Affairs Council of Philadelphia. As chair of the Fed, she almost has to address the implications of the weak jobs report, and markets will be watching closely.

Have a great week!