Slower May Jobs Growth Adds To Fears Of Economic Downturn
May's Jobs Report came back with disappointing jobs growth, suggesting that the economy may be slowing down.
With some concern that economic growth may be slowing, many Wall Street traders, politicians, and analysts have been looking to the Jobs Report to give us an idea on where the economy might be headed, at least in the short-term. Throughout most of 2018 we experienced solid, albeit not spectacular, jobs growth, which led many analysts to wonder if we had entered a new phase of “full employment” where jobs growth would slow down somewhat as employer and employees both assess that we’ve reached a point where new job opportunities are going to be rarer than they were when the post-Great Recession recovery was still young. Additionally, many analysts have turned their attention away from the employment numbers themselves and are paying attention to wage growth, which has remained somewhat stagnant in a range of 2.5% to 3.0% annual growth for the past several years.
The new year, though, seemed to open with a bang thanks to a much better than expected January jobs report that defied even being impacted by the five-week government shutdown that did not end until late January. That enthusiasm was scaled back to some degree in February, which saw largely disappointing jobs numbers during the shortest month of the year. Things bounced back in March, though, with the Department of Labor reporting the creation of 196,000 jobs, although the unemployment rate itself remained stable. There were also some slight upward revisions for January and February, but nothing substantial. In April, we ended up with stronger than expected jobs growth as well as some continued positive signs of wage growth, which had been lagging for much of 2018.
Heading into today’s release of the jobs report for May, the expectation was that we would see relatively strong numbers, with roughly 180,000 new jobs created and the top-line unemployment rate staying solid. Other signals, such as the monthly report from payroll processing firm ADP, which showed only 27,000 jobs created last month, pointed to a less than a spectacular month. As it turned out, hiring for May was far below estimates and much closer to the ADP estimate:
Total nonfarm payroll employment edged up in May (+75,000), and the unemployment rate remained at 3.6 percent, the U.S. Bureau of Labor Statistics reported today. Employment continued to trend up in professional and business services and in health care.
This news release presents statistics from two monthly surveys. The household survey measures labor force status, including unemployment, by demographic characteristics. The establishment survey measures nonfarm employment, hours, and earnings by industry. For more information about the concepts and statistical methodology used in these two surveys, see the Technical Note.
The unemployment rate remained at 3.6 percent in May, and the number of unemployed persons was little changed at 5.9 million. (See table A-1.) Among the major worker groups, the unemployment rates for adult men (3.3 percent), adult women (3.2 percent), teenagers (12.7 percent), Whites (3.3 percent), Blacks (6.2 percent), Asians (2.5 percent), and Hispanics (4.2 percent) showed little or no change in May. (See tables A-1, A-2, and A-3.)
In May, the number of persons unemployed less than 5 weeks increased by 243,000 to 2.1 million, following a decline in April. The number of long-term unemployed (those jobless for 27 weeks or more), at 1.3 million, changed little over the month and accounted for 22.4 percent of the unemployed. (See table A-12.)
Both the labor force participation rate, at 62.8 percent, and the employment-population ratio, at 60.6 percent, were unchanged in May. (See table A-1.)
Total nonfarm payroll employment edged up in May (+75,000). Monthly job gains have averaged 164,000 in 2019, compared with an average gain of 223,000 per month in 2018. In May, employment continued to trend up in professional and business services and in health care. (See table B-1.)
Employment in professional and business services continued to trend up over the month (+33,000) and has increased by 498,000 over the past 12 months.
Employment in health care continued its upward trend in May (+16,000). The industry has added 391,000 jobs over the past 12 months. Construction employment changed little in May (+4,000), following an increase of 30,000 in April. The industry has added 215,000 jobs over the past 12 months.
Employment showed little change in May in other major industries, including mining, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, financial activities, leisure and hospitality, and government.
In addition to the numbers above, the Bureau of Labor Statistics reported that total nonfarm payroll employment for March was revised downward from +189,000 to +153,000 and the number for April was revised downward from +263,000 to +224,000. These revisions made for a net downward revision of -75,000 for those two months.
Combined with this month’s jobs numbers, this puts the average jobs growth for the past three months at +150,667 net jobs created per month, which is down from the previous three-month average. Based on these new numbers, we’ve seen total job growth in 2019 of 825,000 jobs created, for an average of +165,000 jobs created per month so far this year. By way of comparison, 2018 saw 2,024,000 new jobs created in 2018 as a whole for an average of +168,667 net new jobs per month. Combined with the final jobs numbers for 2017, this means we’ve seen a total of 3,777,000 new jobs created since January 1, 2017, a period that has largely coincided with Donald Trump’s tenure as President, for a monthly average over that period of +130,241 new jobs created, which is a decrease from where this average stood as of last month and roughly similar to what we saw during the final four years of the Obama Administration.
During his campaign for President, Donald Trump promised to create 25,000,000 jobs during his Presidency. That would require the creation of 3,125,000 per year over an eight-year term for an average of 261,000 new jobs per month. Over a four-year term that would require 6,250,000 per year, for an average of 521,000 new jobs per month. Based on the average growth rate we have seen since the start of 2017 it would take nearly sixteen years to reach that goal. Based on the average for 2019 to date, it would take roughly thirteen years to reach that goal. Based on the average for the past three months, it would also take roughly thirteen years to reach Trump’s goal. All of this, of course, assumes that we don’t have even a mild recession during that period. Needless to say, it is unlikely that we’re going to see sustained average jobs growth over the next three to seven years that would put us close to the President’s goal absent a significant change in the nature of the jobs market.
Looking deeper into the numbers, the average workweek across the board was unchanged at 34.4 hours while average hourly earnings rose 6 cents to $27.83. Over the year, average hourly earnings have risen at an annualized rate of 3.1%. This is a stronger wage growth number than we’ve seen in recent months, and it’s consistent with the increase we saw last month but it’s worth noting that it comes off several months when wage growth was essentially stagnant, so this may just end up being a statistical blip.
As I’ve said before, the relatively slow growth we’ve seen in wage growth could be a sign we’re hitting an equilibrium point in the jobs market that will preclude big jumps in either hiring or hourly earnings on a sustained basis. Looking at other numbers, labor force participation, the long-term unemployment rate was relatively stable compared to the previous two months.
Nelson Schwartz at The New York Times notes that this disappointing number is likely to increase fears of a softening economy as well as potential negative impacts of the President’s misguided trade war:
Most analysts expect the economy to slow in the current quarter, following a growth rate of 3.1 percent in the first three months of the year. Both retail sales and factory orders declined in April, a sign that consumers and businesses are growing more cautious.
“Over all, the economy is on a fragile footing,” said Lindsey Piegza, chief economist at the investment bank Stifel. “We’re still talking about solid growth at the start of the year but that’s in the rearview mirror. The name of the game is uncertainty.”
Friday’s report also revised down employment data for April and March by a total of 75,000 jobs. Job growth averaged 151,000 a month for the last three months.
President Trump’s escalating trade war with China and the possibility of new tariffs on Mexican imports have unsettled the financial markets. Analysts are parsing the data for any sign that his policies are hurting the economy or are making employers more cautious about adding workers.
“It may not lead to firing but it may cause businesses to postpone hiring because of the uncertainty,” said Michelle Meyer, chief United States economist at Bank of America Merrill Lynch.
Ms. Meyer said she was evaluating job creation in the goods sector, which includes manufacturing, relative to hiring in the service sector. “If global weakness or the trade war filters in, it’s going to have a bigger impact on the goods side of the economy,” she said.
Her economic forecast calls for growth to slow to less than 1.5 percent in the second half of the year.
Not all tariffs are created equal, said Neil Bradley, chief policy officer at the U.S. Chamber of Commerce. The threat of new duties on Mexican imports poses different risks than the tariffs imposed on China.
The China tariffs have been building for months, but many business leaders believe Mr. Trump could reach a deal with President Xi Jinping.
“The shift to Mexico was totally unexpected and it caught people by surprise,” Mr. Bradley said. That effect, he said, was heightened because it came in a statement from the White House, “rather than as an aside to the press or a social media post.”
After government reports showed substantial employment gains in March and April and a growth rate of more than 3 percent in the first quarter, it appeared that fears of a recession were overdone. Now those concerns are back.
Bond yields recently dropped to their lowest level since 2017. This isn’t what is supposed to happen when the economy is strong. During good times, the interest rate on government bonds usually rises, as investors plough their money into riskier assets. Plunging bond yields are a sign that investors are worried that growth is about to falter.
Crude oil prices, which typically rise when traders expect the economy to charge ahead, are down about 20 percent since late April.
The current economic recovery has defied recession predictions several times. This month, the current expansion tied a record for longevity with the recovery of the 1990s.
Nevertheless, Carl Tannenbaum, chief economist at Northern Trust, puts the risk of a recession higher than at any times since the financial crisis of 2008. “They say that policy errors, not old age, end expansions, and the steps taken on the trade front in the last five weeks fall under that,” he said.
These numbers also make a rate cut by the Fed more likely:
For policymakers at the Fed, who are meeting later this month, the May numbers could be significant. On Tuesday, Jerome H. Powell, the central bank’s chairman, hinted that policymakers were prepared to cut rates if the trade war hurt the economy.
Until relatively recently, the expectation was that the Fed would continue raising its benchmark interest rate, something it started doing in December 2015. The Fed changed course in January, with Mr. Powell suggesting that very modest inflation and weakness in Europe and China warranted a neutral stance.
The stock markets took Mr. Powell’s remarks on Tuesday as a sign that the next Fed move might be a rate cut, prompting a rally. The weak showing for May will only fuel speculation that a rate cut could be imminent, perhaps as early as the central bank’s next policy meeting on June 18 and 19.
The other issue that these weaker than expected numbers raise, of course, are the political implications they might portend. As I’ve said before, the state of the economy is typically one of the most important factors that voters react to when they vote. As things stand, Trump’s job approval when it comes to the economy is far better than his general approval level and may well be the only thing keeping him afloat. If that changes, then getting re-elected could become even more difficult than it already appears to be.