Disappointing May Jobs Report

Disappointing May Employment

We saw a Disappointing May Jobs Report come out this week. Job creation in May missed estimates by a lot. Job creation in April and March was revised lower, making this a bad report. May job creation was slightly lower than I expected, but was still better than the ADP report. It was within the 66,000 average margin of error.

Specifically, there were 75,000 jobs created which missed estimates for 180,000. Markit expected there to be 150,000 jobs created. I simply said there would be more than 100,000 jobs created.

As you can see from the chart below, after the revisions, there were 153,000 jobs created in March and 224,000 jobs created in April. The April revision was -39,000 and the March revision was -36,000.

Generally, we see negative revisions on good reports and positive revisions on bad ones. I wouldn’t be surprised if the May report ends up showing over 100,000 jobs after the 2 revisions it goes through.

This jobs report is the type of report you’d expect in a full labor market. Except wage growth disappointed. In a full labor market, the unemployment rate is low, job creation is around 100,000, and wage growth is high.

As you can see from the chart below, the manufacturing sector added 3,000 jobs which is solid considering that the sector is in a slowdown. This is consistent with the increase in the employment reading in the ISM manufacturing report.

Overall, this report isn’t as bad as the headline miss makes it seem

Disappointing May - Government created -15,000 jobs. It was supposed to create 5,000 jobs. That means private sector payrolls missed estimates by 85,000 instead of 105,000. The 7,600 decline in retail trade jobs is in line with the Challenger job cut report.

Unsurprisingly, the job growth in education and healthcare was similar to what the ADP report showed because this category isn’t cyclical. Unfortunately, it didn’t boost overall job creation enough to meet estimates.

Even though professional and business services has a negative correlation with ADP, it also was close to the private sector survey. Economists overthought this BLS report by not believing the ADP report on Wednesday because sometimes it’s far from the government’s reading.

Disappointing May - Wage Growth Falls Further

Only part of this labor report that wasn’t consistent with a full labor market was the decline in wage growth. Good thing for workers is inflation is falling, so real wage growth is still positive.

Oil prices hit a 5 month low this week. May CPI hasn’t come out yet, but estimates for headline inflation expect it to fall from 2% to 1.9%. The CPI report will be released next Wednesday.

Specifically, monthly average hourly wage growth was 0.2% which matched April’s growth rate and was below estimates of 0.3%. Yearly growth was 3.1% as you can see from the chart below.

It missed estimates and April’s reading which were both 3.2%. The hourly work week stayed at 34.4 hours which missed estimates for 34.5 hours.

Average weekly earnings growth continued its recent downtrend as it fell from 2.9% to 2.8%. That’s the weakest growth since January 2018. Growth is down from its peak of 3.6% in October 2018. That’s around when the 10 year bond yield peaked and inflation estimates were higher.

Specifically, the 10 year bond yield peaked at 3.24% on November 8th. In October, the 5 year breakeven inflation rate was 1.99% and the current rate is 1.71%.

Unemployment Rate & Participation Rate

Disappointing May - U3 unemployment rate stayed at 3.6% which was below estimates for 3.7%. The U6 unemployment rate, which includes those unemployed, marginally attached to the labor force, and those working part time for economic reasons, fell from 7.3% to 7.1%. That’s the lowest rate of this expansion.

We only have U6 data from the prior two expansions. Since the 1990s expansion was the longest since the 1800s and the prime age labor force participation rate hit an all-time record high, it’s probable that its U6 trough was historically low.

U6 trough in the 2000s cycle was 7.9% in December 2006. This current cycle has already surpassed that one. In the 1990s cycle, the trough was 6.8% in October 2008. This cycle is just 0.3% from matching that mark.

Current U3 rate of 3.6% is 0.2% below the 1990s cycle’s trough. This is the lowest U3 rate since December 1969.

Labor participation rate was 62.8% which met estimates and was the same as last month. Similarly, the prime age labor force participation rate was stagnant at 79.7%. It peaked this cycle at 79.9% in both January and February.

Last cycle, this rate peaked at 80.5% and in the 1990s cycle it peaked at 81.9%. If the economy keeps growing, there’s slack in the labor market left to support it.

ECRI Leading Index Follows Stock Market Lower

Disappointing May - Obviously, we’ve seen stocks rally in the first week of June. However, the ECRI leading index’s yearly growth rate is one week behind. As you can see from the chart below, this Friday the index from the week of May 31st came out.

It followed the stock market’s performance lower as its yearly growth rate fell to -1.3%. I’m guessing when it’s updated next week, it will show an improvement because stocks rallied sharply in the beginning of June. Weakness in late 2018 and early 2019 still implies weak growth because this index leads the economy by 2-3 quarters.

Disappointing May - Conclusion

May employment report was moderately disappointing. The overall data was sullied by the -75,000 revision to the prior two months. Wage growth fell further. Only good news for consumers is inflation is falling with wage growth as headline CPI is expected to be 1.9% in May.

The government pushed overall job creation down by 15,000. Over the next few quarters, it will be a big job creator because the 10 year census will be taken next year. If there is a recession, newly unemployed workers will be quick to apply to census jobs. 

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