BLS Report Shows 138,000 Jobs Created

The ADP May private sector jobs report on Thursday signaled a great BLS jobs report would come on Friday. Sometimes the ADP report doesn’t indicate how the BLS report will be. This was one of those months as the BLS report was bad across the board. It looked like the online job listings report that I showed in a previous article. That report made it look like a recession was coming. This BLS report was similar as the nirvana of a strong labor market and strong corporate earnings faded away quickly. This report didn’t affect the chances of a rate hike in June or September although there was chatter on CNBC that the third rate hike may be moved to December. I will review the potential changes to Fed policy at the end of this article.

The headline number was 138,000 jobs created which was a big miss from the average estimate of 185,000 jobs. The group think of economists combined with the strong ADP report caused this report to miss 83 out of the 84 estimates. As you can see from the chart below, this was the weakest report since March. The April and March numbers were revised lower by a combined 66,000 jobs. Often bad reports are mixed with upward revisions to past data, making it a wash, but this negative revision made it a disaster. The three month average jobs gains are 121,000.

The slowdown in jobs growth is particularly disconcerting because the year over year growth rate peaked at 2.3% in Q1 2015. The recovery is long in the tooth. The average length of time between the peak in the year over year jobs growth and the recession in the past 3 cycles has been 24.7 months. The current streak is 27 months. In 3 months, we will match the early 2000s recovery. With GDP growth set to rebound in Q2, it looks like there will be a new record set. That’s my base case expectation given the uniqueness of this economy. It’s defying logic and most recession indicators.

The major details which make or break reports were weak as well. I would argue that the labor participation rate and the wage growth are more important than the headline number because the headline can mask the weakness. The headline that the unemployment rate fell from 4.4% to 4.3% is a massive distortion from reality because the labor force shrunk. As you can see from the chart below, the labor force participation rate fell from 62.9% to 62.7%. This drop reverses much of the gains seen after the election. There was a thesis that Trump’s election encouraged discouraged workers to jump back into the labor force because they were optimistic. This theory was squashed by this report. The number of people employed fell 233,000 to 152.923 million. The labor force fell by 429,000 as 608,000 people left the labor force. The labor market lost 367,000 full-time jobs and gained 133,000 part-time jobs.

Reports like this one are a stark reminder that this recovery is unlike others in its weakness. The stock market has become unhinged from reality, and the Fed is following in its footsteps. The chance of a rate hike is 95.8% in June. The chance of a rate hike in September is 29.6%. The Fed is clearly tied to the performance of the S&P 500 because inflation is declining and the labor reports in March and May were very weak. The market for Fed rate hikes figures the Fed can raise rates as the S&P 500 was up 0.37% on Friday despite the terrible report. The S&P 500 has relied on either great economic data or support from the Fed this cycle, but now it has become unhinged as the Fed is hawkish and the economic data was bad on Friday. The stock market is supported by a great Q1 earnings season, but earnings growth can’t continue if the labor market weakens which is why the market should have fallen after this report was released.

As I mentioned, every detail of this BLS report was terrible. Many were expecting to see the gains in the labor market translate to wage growth gains, but instead the weakness in the labor market has translated into weak earnings growth. This potentially means the wage inflation that we typically see at the end of recoveries won’t happen this time. That’s a theory I have been pondering. This disaster would appear when wage growth dissipates in the next recession. Average hourly earnings growth was 2.5% year over year which missed expectations for 2.6% growth. Hourly earnings grew 0.2% month over month. As you can see from the chart below, average weekly earnings growth was 2.46% because the average workweek was unchanged at 34.4 hours. This is bad news for future consumer spending growth.

It’s important to review the breakdown in jobs added by industry because the BLS report was so much different from the ADP report. The professional business services category was much weaker in the BLS report than the ADP report. The BLS report showed 25,100 in gains, while the ADP report showed 88,000 gains. Because of negative revisions, retail employment is down 4 straight months and is at an 11-month low. Another category which was much different from the ADP report was leisure and hospitality. Unlike most of the other categories, the ADP report was weaker than the BLS report. ADP showed an 11,000 decline and the BLS report showed 31,000 in gains as the waiter and bartender jobs growth was strong again.

Conclusion

There has been an emerging difference in the GDP forecasts and the Citi Economic Surprise Index. This is possible because a report can be disappointing, but sill show growth. The question of which to believe is an open ended one. The May BLS labor report sides with the surprise index and questions the stock market bulls’ resolve. However, in this passive investing environment, investors don’t care about the BLS report. This is a mistake because another weak report in June could catalyze a correction. Currently it’s still too early to draw any big conclusions from this report because it will be revised twice. Once the 3-month job growth average is below 100,000, I will be concerned about a recession in the next 6 months. We’re not there yet.

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