Orlando's Outlook: Mayday for May's jobs report


Bottom line The official unemployment rate (U-3) ticked down to a 16-year low of 4.3% in May, while the labor impairment rate (U-6) fell to near-decade low of 8.4%. Unfortunately, both of these widely followed labor-market metrics declined for the wrong reasons, as the rest of this morning’s U.S. employment report was a significant disappointment. Nonfarm and private payrolls were much weaker than expected in May—with sizable downward revisions in March and April—while the household survey, retail, manufacturing and government hiring were all negative.

But as we take a step back and look at the bigger picture, continued strength in the ADP report and the initial weekly jobless claims—important leading indicators—suggests that May’s labor-market weakness is transitory. So what’s the problem? There are two, in our view, as the shortage of skilled labor and the chilling effect on hiring associated with the lack of progress on meaningful fiscal-policy reforms in Washington have combined to crimp the jobs market over the past three months to its slowest pace in nearly five years.

Benchmark 10-year Treasury yields have fallen right to support at 2.15% in a flight-to-safety rally due to concerns about slower economic growth and inflation, while stocks continue to surge to record highs on the belief that Congress and the Trump administration will eventually get its legislative act together to successfully implement structural fiscal-policy reform, which we desperately need. We believe that today’s sloppy jobs report leaves the Federal Reserve undeterred in its desire to hike interest rates on June 14. But if these recent negative trends continue, the Fed’s next hike in September may be on hold.

Terrible month for May nonfarm payrolls. They added only 138,000 jobs, well below the Bloomberg consensus of 182,000 and our own much more optimistic 225,000 estimate here at Federated. The Bureau of Labor Statistics (BLS) revised March and April sharply lower by a combined 66,000 jobs. March’s preliminary report of a weather-impaired 98,000, revised down to a meager gain of only 79,000 last month, was revised down again this morning to a final gain of only 50,000. April’s preliminary increase of 211,000 jobs was revised down this morning to a gain of 174,000. So the monthly average over the past three months of only 121,000 jobs (the slowest pace since the three months ended July 2012) is nearly half the more robust average of 224,000 in January and February.

Private payrolls weak, too. They added only 147,000 jobs in May, well below the Bloomberg consensus of 175,000. The BLS revised March and April lower by a combined 39,000. March’s preliminary reading of only 89,000 added jobs, revised down to a gain of 77,000 last month, was revised down again this morning to a final gain of only 59,000, largely due to winter storm Stella. April’s preliminary report of adding 194,000 jobs was revised down this morning to a gain of 173,000. So the monthly average of 126,000 new jobs over the past three months is well below January and February’s much stronger average of 213,000.

ADP blows out consensus. In sharp contrast, the ADP National Employment Report, a forward-looking proxy for private payroll growth, added 253,000 jobs in May, which was much stronger than consensus expectations for a gain of only 180,000 and April’s gain of 174,000. Moreover, the continued healthy pace in hires by small and midsized firms suggests that the labor market and the U.S. economy remain in solid shape. Small firms with fewer than 50 employees added 83,000 jobs (33% of total, compared with April’s upwardly revised 68,000, or 39% of its total); midsized companies with 50 to 500 employees added 113,000 (45% of total, compared with April’s upwardly revised 89,000, or 51%); and larger companies with more than 500 employees hired 57,000 (23% of total, compared with April’s downwardly revised 17,000, or only 10%).

Jobless claims remain low. New initial weekly unemployment claims (a leading economic and employment indicator) in the survey week that ended May 13 hit 233,000, just above the 44-year cycle low of only 227,000 set in February.

Government hiring slips. This difference between private and nonfarm payrolls collectively cut 9,000 federal, state and local government jobs in May. That compares with a downwardly revised gain of only 1,000 in April (originally added 17,000) and a downwardly revised loss of 9,000 in March (originally added 2,000). That contrasts with solid gains of 10,000 in February and 12,000 in January. In May, the feds added 8,000 jobs, but local governments cut 9,000 and states slashed 8,000.

Households also lose. The admittedly volatile household survey lost jobs for the first time in four months, dropping 233,000 positions. That compares with the addition of 156,000 jobs in April, 472,000 in March and 447,000 in February, which were solid rebounds from January’s modest loss of 30,000. The household survey is a leading indicator for nonfarm and private payrolls, so May’s outright loss of jobs is clearly a concern regarding future payroll gains in June. It also serves as the basis for the unemployment rate.

Unemployment, labor-impairment and participation rates all fall. The civilian labor force plunged by 429,000 workers in May, down sharply from gains of 12,000 in April, 145,000 in March, 340,000 in February, 76,000 in January and 184,000 in December. As a result, the unemployment rate, calculated from the drop in the household survey, ticked down to 4.3% in May (its lowest level since February 2001) from 4.4% in April, 4.5% in March and 4.7% in February. The labor-impairment rate—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—declined sharply again to 8.4% in May (its lowest level since November 2007) from 8.6% in April, 8.9% in March, 9.2% in February and 9.4% in January. So the slack in the labor market is rapidly being wrung out. Unfortunately, the labor-force participation rate also declined, falling to 62.7% in May from 62.9% in April and from its two-year high of 63% in March. This metric is getting close to its 38-year cycle low of 62.4%, set in October 2014.

Hours worked and wage growth flat. The average private work week for all employees remained flat in May at 34.4 hours, compared with 34.3 hours in both March and February, which had matched a two-year low. That’s disappointing, as an increase of 0.1 hour worked is the equivalent of adding an estimated 350,000 or more jobs to the economy. Hourly wages also were flat on a month-over-month basis, rising 0.2% in May. On a year-over-year basis, wages increased only 2.5% in May for the second-consecutive month, matching its weakest reading since August 2016), compared with a downwardly revised gain of 2.6% in March, 2.8% in February and an eight-year, cycle-high gain of 2.9% in December.

Construction and manufacturing flip flop. Due to better weather, construction hiring leapt by 11,000 jobs in May, up from a downwardly revised loss of 1,000 in April (originally a modest gain of 5,000) and breakeven in March. But that’s still down sharply from a gain of 54,000 in an unseasonably-warm February, the largest gain since March 2007. Manufacturing, on the other hand, lost 1,000 jobs in May, down from an upwardly revised gain of 11,000 in each of April and March and 22,000 jobs in February (a 3-year high).

Retail slump continues. It lost 6,000 jobs for the fourth consecutive month in May, after downwardly revised losses of 6,000 in April (originally reported as a gain of 6,000) and 40,000 in March (originally reported as a loss of 27,000), and 29,000 in February.

Temps remain positive for the fifth consecutive month. It had moderate gains of 13,000 jobs in May, 4,000 in April, 13,000 in March, 10,000 in February and 15,000 in January. Temps are an important leading indicator of employment growth, so this trend is encouraging for June and beyond.

Leisure solid. This economically sensitive category added 31,000 jobs in May, after a powerful rebound in April with 58,000 (its highest level in a year), which was up sharply from only 11,000 in March, 33,000 in February and 15,000 in January.

Education & health care strong again. It added 47,000 jobs in May, only slightly below April’s upwardly revised gain of 50,000 (originally reported as a gain of 41,000), as both months are well above March’s 16,000. But we’re still down sharply from February’s addition of 66,000 new jobs.

JOLTS at an eight-month high. The Job Openings and Labor Turnover Survey (JOLTS) measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends. Job openings rose to an eight-month high of 5.743 million in March (the most recent data available) versus a downwardly revised 5.682 million in February. This confirms our view that the weak March nonfarm payroll report was an aberration and that April’s would rebound, which it did, with a noteworthy improvement in openings in manufacturing. The hiring, quits and layoff rates were all unchanged at 3.6%, 2.1% and 1.1%, respectively. The trend continues that employers are having a difficult time finding people with the right skill set for their open positions.

Ford drives up Challenger report. The May jobs-cut data from Challenger, Gray & Christmas jumped to 51,700 from 36,600—a 41% month-over-month increase and the highest amount of cuts since April of 2016—due largely to the Ford Motor Company’s announcement that it would lay off 10% of its salaried employees.

Good luck to all of this year’s CFA candidates on tomorrow’s exam!