Instant Analysis: Employment report for May

Posted By Scott Anderson In Economic Outlook | No Comments

Job growth went on strike in May.  Nonfarm payrolls increased a modest 38K in May, far below economist consensus expectations for 162K.  This was the lowest monthly gain in jobs in six years, and the three-month average of monthly gains fell to 116K.

health care workers looking at charts [1]There was also a net downward revision of past payroll gains of 59K.

The industry sector breakdown

Construction jobs dropped 15K, information dropped 34K largely due to the Verizon strike, durable goods manufacturing lost 18K, and mining was also down 10K jobs.  Private services added 61K largely due to health care payrolls, which increased by 46K.

The unemployment rate dropped to 4.7% from 5.0%, the lowest level since November 2007; but that was due to a drop in the labor force and not really good news.  The U.S. labor force contracted by 458K in May, and the labor force participation slipped two-tenths to 62.6%.

On a brighter note, average hourly earnings increased 0.2% last month and is 2.5% higher than a year ago.

The bottom line

Job growth has visibly weakened over the last two months and will give the FOMC some pause as they consider another rate hike over the next few meetings.  We believe the headline number implies a worse labor market than actually exists.  The Verizon strike artificially pushed the number down by at least 34K.  Still the job growth trend has certainly turned down as cyclical sectors, such as manufacturing and mining, continue to bleed jobs, and private service sector job growth fades.

The Fed will remain in wait-and-see mode on weaker U.S. job growth and Brexit risk in June.  We are pushing out our forecast for the next rate hike from the Fed to September FOMC meeting from July.  The Fed will likely need to see a convincing rebound in job growth in the next few months to give the green light to move again.

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