Orlando's Outlook: Face plant

Bottom Line Today’s dismal employment report for May was the exclamation mark on a miserable week for domestic economic news. On the heels of a significant downward revision to first-quarter Gross Domestic Product (GDP) growth to only 1.9%, a sharp decline in consumer confidence, and disappointing readings for the national and several of the regional manufacturing indices, the Labor Department reported that May suffered the weakest monthly job creation in a year, with sizable downward revisions for both March and April. Unfortunately, the domestic economic soft patch that we’ve been forecasting is still getting worse, and financial markets responded glumly. Benchmark 10-year Treasury yields plunged to a record low of 1.44% today, with stocks falling by another 2%, effectively wiping out the powerful 12% rally in the S&P 500 that we enjoyed to start the New Year. Economic metrics—and investor confidence—are so poor both here and abroad, in fact, we believe a coordinated global fiscal and monetary policy response must soon be in the offing, to boost growth prospects in both China and the U.S., and to create a more unified political structure with stronger fiscal integration in the eurozone, before Europe disintegrates completely. Here at home, given the colossal failure of our fiscal policies in Washington—stark in light of today’s significant jobs miss—the Federal Reserve will likely extend its monetary policy accommodation in some form when Operation Twist expires at midyear.

Plunge in nonfarm payrolls May rose by a paltry 69,000 jobs, which was less than half of the consensus estimates for a gain of 150,000 jobs, and well below even the drop-dead whisper estimates of a 125,000 gain. Moreover, the Bureau of Labor Statistics (BLS) negatively revised March and April results by 49,000 jobs. March’s preliminary gain of 120,000 jobs, which was revised up sharply to a gain of 154,000, was revised back down to a final gain of 143,000. April’s preliminary gain of 115,000 nonfarm jobs was gutted to a gain of only 77,000 jobs. So the average monthly gain over the past three months of only 96,000 jobs—and falling—is only 38% of the 252,000 average monthly pace set during December, January and February, which is clearly unacceptable.    

Private payrolls plummet too Private payrolls grew by only 82,000 in May, which was exactly half of the consensus forecast for a gain of 164,000 jobs. Similarly, the BLS collectively revised March and April results down by another 62,000 jobs. March’s weak preliminary increase of 121,000 jobs, which was revised up to a gain of 166,000, was revised back down to a final gain of 147,000 jobs. April’s preliminary increase of 130,000 jobs was revised sharply lower to a gain of only 87,000 jobs. So the average monthly gain during March, April and May of 105,000 private jobs was nearly 60% lower than the average gain of 255,000 jobs registered during December, January and February.    

Household survey rebounds In what passes for good news in an otherwise dreadful jobs report, the household survey gained 422,000 jobs in May, reversing two straight months of job losses, after a string of seven consecutive monthly gains. The household survey had lost 169,000 jobs in April and 31,000 jobs in March, after posting an average monthly gain of 484,000 jobs during December, January and February. So May represents an effort to get back on track, which is a particularly hopeful sign to us, because the household survey is typically an important leading employment indicator for both nonfarm and private payroll employment.   

But initial weekly jobless claims are rising However, weekly jobless claims, another important leading employment and economic indicator, rose by 10,000 claims to 383,000 for the week ended May 26, which is clearly moving in the wrong direction. Weekly claims had troughed at 351,000 in mid February, smack in the middle of the critical 300,000-400,000 range that usually reflects a labor market that’s healthy and producing jobs. But they surged to 392,000 in mid-April, due in part to the seasonal distortions associated with the rotating Easter and Passover holidays. The subsequent decline to a cycle trough of 368,000 claims for the week ended April 28 suggested to us that the seasonal distortions were finally eliminated from the data. But this increase of 15,000 claims over the past month is disturbing. 

ADP weak too This important proxy for private payroll growth has also slowed considerably, posting a much weaker-than-expected 133,000 jobs in May, on the heels of a downwardly revised gain of only 113,000 jobs in April, for a two-month average of 123,000 jobs. By comparison, ADP reported a healthier gain of 200,000 jobs in March, 228,000 in February, and 182,000 in January, for a three-month average of 203,000 jobs. Importantly, ADP reported that in May, 67,000 jobs came from small firms, 57,000 from mid-sized firms, and only 9,000 from larger companies, consistent with the pace of job growth we’ve seen among small- and mid-sized businesses, which are the engine of job creation in the U.S. The government’s nonfarm establishment survey eventually captures this trend in job creation with a lag of several months, which is why ADP remains an important leading employment indicator for us. 

Temps still positive Temporary help, which is another important leading indicator of employment growth, added a tepid 9,000 jobs in May, in the wake of adding a downwardly revised 13,000 jobs in April and a loss of 13,000 jobs in March. That compares with much stronger gains of 50,000 jobs in February and 36,000 jobs in January. 

Construction plunges while manufacturing improves Construction lost 28,000 jobs in May, compared with upwardly revised losses of 5,000 jobs in April and 14,000 jobs in March. That contrasts with a muted loss of only 1,000 jobs in February and solid gains of 18,000 and 26,000 jobs, respectively, in January and December, so there was clearly some weather-related impact. But given the general improvement we’ve seen in housing in recent months, May’s job loss was very disappointing. Manufacturing added 12,000 jobs in May, compared with 9,000 jobs in April (its smallest gain in five months), 41,000 jobs in March, 30,000 jobs in February and 52,000 jobs in January. 

Government job losses continue to reaccelerate The difference between private and non-farm payroll gains in May was the loss of 13,000 federal, state and local government jobs, compared with downwardly-revised losses of 10,000 jobs in April and 4,000 in March.The government had actually added 5,000 jobs in February, after a modest loss of 2,000 jobs in January. 

Unemployment rises Unemployment, which ticked up to 8.2% in May compared with 8.3% in February and 8.9% in October 2011, has now consistently exceeded 8.0% since February 2009, the longest such stretch of labor-market ineptitude since government record-keeping began in 1948. Meanwhile, the labor impairment rate—also known as the “total” (U-6) rate of unemployment, which more broadly includes discouraged workers and the underemployed—rose to 14.8% in May from 14.5% in both April and March. As more unemployed exhaust their extended jobless benefits, they are forced to begin to look for work again, which is why the number of unemployed rose by 220,000 last month. The labor force participation rate rose to 63.8% in May from a 30-year cycle low of 63.6% in April. The participation rate had been as high as 65.7% when the Great Recession ended in June 2009, but the combination of a sharp increase in discouraged workers—due to an education and skills mismatch and a lack of housing mobility—and the structural retirement of younger working women and aging baby boomers from the labor force, has caused this metric to plunge, dragging along with it both the unemployment and labor-impairment rates.  

Wages flattish and private hours worked down Average hourly earnings rose by a tick in May, compared with April’s similar 0.1% monthly increase, which puts year-over-year wage gains up by a less-than-expected 1.7% last month, a tick slower than in April. The average private workweek for all employees ticked down to 34.4 hours in April, which is disappointing, because each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 400,000 jobs to or from the economy.