The May jobs report was a big surprise to most economists and market analysts. The consensus expectation was that the US economy would add over 100,000 jobs. Instead, the number came in much lower at a reported increase of just 38,000 jobs for the month. This has forced many economists to revisit their outlook on the US economy and has many market participants speculating as to how this data may influence the Federal Reserve’s decision whether or not to raise interest rates this summer.
Digging into the May jobs report, the data looks even worse than the headline number portrays. Not only was the pace of job growth in May quite weak, the numbers for March and April were revised downward showing that the labor force may not be as strong as previously estimated. The March job numbers were revised from 208,000 jobs to 186,000 and the April numbers were revised from 160,000 to 123,000. So the jobs that were added in May were almost completely offset by the downward revision to the estimates from April.
The official unemployment rate declined in May from 5.0% to 4.7%. However, this was largely due to a 0.2% decrease in the labor force participations rate. This means the decline was largely due to individuals leaving the labor force rather than finding jobs. The labor force participation ratio is currently 62.6% of working-age Americans, a historically low level.
In addition, the number of people working part-time for economic reasons (people working part-time who would prefer full-time employment) increased by 468,000 in May. This, combined with the decrease in the labor force participation rate, may signal that individuals are either settling for part-time work or dropping out of the labor force due to a lack of employment opportunities that match their skill set.
Whereas the unemployment rate tends to be a lagging economic indicator (a signal of where the economy has been rather than where it is going) the weekly initial claims for unemployment insurance is a leading economic indicator. Initial claims for unemployment insurance increased to 267,000 at the end of May, up from its low of 248,000 in mid-April. This seems to confirm the signs of some weakening in the US labor market.
It is important to stress that a few data points do not make a trend. The statistical techniques used to gather the official labor market numbers are highly technical and sometimes prone to overstating the strength or weakness in the labor market over short time periods. Therefore, May’s weak data could end up being a statistical anomaly or could be due to factors that are not easily identifiable but will dissipate over time. So it is important to not put too much weight on one month’s data.
However, the weak job numbers are getting more scrutiny than they likely would have due to the implications they may have on upcoming Fed policy. The minutes from the Feds April meeting showed that the Fed Governors were weighing the possibility of an interest rate hike this summer. However, the Fed has stated many times that its policy path will be “data dependent” and therefore may shift based on a variety of economic data points. So the question is: Was the May jobs data weak enough to cause the Fed to hold off on increasing rates this summer? So far, speeches by Fed Governors seem to be sending mixed signals which may increase uncertainty, and thus market risk, around the Fed’s upcoming June and July meetings.
The one thing that we can conclude from all of this is that there will be a lot of people closely scrutinizing the June jobs report for signs that the labor market is either continuing to deteriorate or is bouncing back from the weakness in May.