Orlando's Outlook: A 'Goldilocks' jobs report
Bottom line This morning’s mixed labor report for May was the best of all possible worlds—strong enough to confirm that our “Spring Swoon” economic forecast won’t morph into something much worse, but sufficiently weak to keep the Federal Reserve on the sidelines. Amidst much handwringing over the past fortnight heading into today’s Labor Department report, the S&P 500 had corrected by the requisite 5%, from an overbought level of 1,687 on May 22 to an oversold reading of 1,598 yesterday. But equity investors were so encouraged by today’s news that stocks have thus far bounced from this buyable dip by nearly 3%.
Whither the Fed? Up until this morning, the consensus among Fed Watchers was that the policymakers were poised to begin to taper their aggressive $85 billion-per-month bond purchases as early as the upcoming Federal Open Market Committee (FOMC) meeting on June 18-19. We vehemently disagree. In our view, this will ultimately be a data-dependent decision on the Fed’s part, and the reality is that the U.S. economy—particularly the labor market—is not sufficiently robust for the Fed to begin to pull its monetary policy accommodation. We believe that the undeniably tepid tone of today’s labor report should keep the Fed firmly anchored to the sidelines until later this year (September or December) or perhaps early 2014.
Steady nonfarm payrolls May rose by a stronger-than-expected 175,000 jobs, which was above consensus estimates for a gain of 163,000 jobs. But the Bureau of Labor Statistics (BLS) revised March and April lower by a combined 12,000 jobs, which offset May’s modest upside surprise. March’s dreadful preliminary increase of only 88,000 jobs, which was revised sharply higher to a more respectable gain of 138,000 jobs last month, was tweaked up again to a final gain of 142,000. April’s preliminary gain of 165,000 nonfarm jobs was revised down to a more modest gain of 149,000 jobs. So over the past three months, the economy averaged 155,000 jobs, which is less than half of February’s much stronger final gain of 332,000 jobs. In our view, the Fed needs to see a sustainable run of February-like job creation to begin to taper.
Same with private payrolls May added 178,000 jobs, which was slightly higher than the consensus forecast for a gain of 175,000 private jobs, but the BLS collectively revised March and April down by 19,000 jobs. March’s tepid preliminary gain of only 95,000, which was revised up to a much stronger gain of 154,000 jobs last month, was unrevised today. April’s preliminary increase of 176,000 jobs was revised down to a gain of 157,000. So the trailing three-month average of 163,000 is well below February’s powerful final gain of 319,000 private jobs.
Unemployment rate rises The U3 rate ticked up to 7.6% in May from a five-year low of 7.5% in April. But we’re actually encouraged by this shift, because the labor-force participation rate also ticked up to 63.4% from a 34-year cycle low of 63.3% in April, due to an increase in the civilian labor force of 420,000 in May, compared with a gain of 210,000 workers in April and a decline of 496,000 workers in March. To us, this means that unemployed workers are now beginning to feel sufficiently confident that they can actually find a job, so they are starting to actually look for work again, which is why the number of unemployed people rose by 101,000 in May. The labor impairment rate (U6)—also known as the “total” rate of unemployment, because it more broadly includes discouraged workers and the underemployed—slipped a tick to 13.8% in May, due to solid household gains.
Household survey holds bounce The household survey surged by 319,000 jobs in May, which was slightly better than the 293,000 jobs added in April, compared with March’s outright loss of 206,000 jobs. The household survey is an important leading indicator for both nonfarm and private payroll growth, so this swing is a potentially very encouraging precursor for a possible second-half rebound in employment.
Manufacturing slumps, construction mixed With the national ISM data recently slipping into “contraction” mode at 49.0 in May for the first time since June 2009, it’s no surprise that manufacturing has turned negative. In the weakest part of today’s report, manufacturing lost 8,000 jobs in May, April was revised down from no change to a loss of 9,000 jobs and March was revised down from a modest gain of 2,000 jobs to a loss of 4,000 jobs, versus a robust gain of 23,000 new jobs in February. Construction added 7,000 jobs in May, while April was revised from a loss of 6,000 jobs to a smaller loss of 2,000 jobs, and March was also revised up from gains of 13,000 jobs to an increase of 16,000. That compares with a powerful gain of 48,000 jobs in February, which was a six-year cycle high. Recovery work from Hurricane Sandy and a seasonal upturn in housing should buoy construction. But in our view, the Fed is not tapering until manufacturing and construction strengthen sustainably.
Temp hiring stays strong Temporary help, another important leading indicator of employment growth, gained 26,000 jobs in each of May and April, versus increases of 20,000 jobs in March and 28,000 in February.
Retail rebounds Retailers in May added 28,000 jobs, a six-month high, versus a gain of 20,000 jobs in April, a loss of 3,000 jobs in March and a gain of 26,000 jobs in February, which suggests that perhaps retail may be strengthening as it heads into the important Back-to-School season in July.
Government job losses continue to slow The difference between private and non-farm payroll gains in May was the loss of only 3,000 federal, state and local government jobs, compared with losses of 8,000 jobs in April (originally reported as a loss of 11,000) and 12,000 in March (originally reported as a loss of 16,000 jobs), versus the actual addition of 13,000 jobs in February. Most of the federal losses from the automatic spending sequester were achieved through temporary furloughs rather than permanent layoffs.
Wages and hours worked flat In another area of disappointment for May’s mixed labor report, average hourly earnings last month were unchanged, compared with 0.2% wage growth in April, while year-over-year wages rose by 2.0% in May, which was the same pace of growth as in April. The average private work week for all employees was also unchanged at 34.5 hours in May. That’s significant, as a change of only 0.1 hours worked is the equivalent of adding or subtracting an estimated 300,000 jobs to or from the economy.
ADP much weaker again The ADP report, an important forward-looking proxy for private payroll growth, rose by a much weaker-than-expected 135,000 jobs in May, which was well below consensus expectations for a gain of 165,000 jobs. April’s preliminary gain of 119,000 was revised down to an increase of 113,000, but the preliminary gain of 158,000 jobs in March, which was revised down to a gain of only 131,000 last month, was revised back up to a final gain of 154,000. The ADP survey, now eight months into a new methodology, averaged a solid 202,000 new jobs created per month from October through February, so the recent average of only 134,000 jobs for March, April and May represents a pace that is one-third slower. ADP also reported that in May, small firms added 58,000 jobs, mid-sized companies added 39,000 jobs, and larger companies adding 39,000 workers.
Initial weekly jobless claims steady Initial weekly jobless claims, an important leading economic and employment indicator, were at 346,000 for the week ended June 1, 2013, and the smoother four-week moving average is now at 352,500. To be sure, the corresponding survey week for today’s May labor report was for the week ended on May 18, during which weekly claims were 344,000. While this is certainly elevated from the 327,000 level achieved during the week ended April 27, we believe that weekly claims remain stable.