May’s Jobs Report: A Tipping Point?

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May’s Jobs Report: A Tipping Point?

Whenever we hear a Fed speaker talk about rate policy just ahead of the release of important economic data, we always assume they know the impending data. So when Chair Powell sounded slightly more dovish on Tuesday, we wondered what he knew was on the way. The Beige Book, as Jessica noted on Wednesday, was slightly more upbeat. So it wasn’t that…

Then we saw Friday’s Jobs Report, which printed just 75,000 new positions added in May, and we had our answer. Expectations were for 180,000 additional jobs, and wage growth of 3.1% also missed consensus by 0.1%. Powell knew that markets would see this as a weak report, so his comments about acting “as appropriate to sustain the expansion” were meant to acknowledge that reality.

At the same time, digging through the entire report highlights the challenge the Federal Reserve faces just now. Three points on this:

#1: Yes, the pace of US job growth has clearly slowed in 2019:

  • The 3-month average of “Jobs Added” is down to 151,000. This is slightly less than the monthly average of 156,000 Americans that have entered the workforce over the same period.
  • That recent average compares to 223,000 monthly jobs added in 2018. This run rate was enough to assimilate new workers (192,000/month) and still absorb existing unemployed workers.

Takeaway: 2019’s jobs growth is just treading water in terms of added new positions net of natural workforce population growth.

#2: At the same time, the internal measures we look at as early-warning signs do not show any real cause for concern just yet:

  • African American unemployment as 6.2% in May 2019, lower than the 6.8% average for the year-to-date. Participation rates for this cohort were 62.3% in May, in line with the 62.5% YTD average as well. History shows this demographic group typically sees higher unemployment before it hits the broader population.
  • Unemployment for those workers with only a high school diploma (36 million people, 22% of the workforce) was stable last month at 3.5%, in line with April’s reading and better than 3.6% YTD average. Participation rates are slightly lower now at 57.4% versus the YTD mean of 58.1% but similar to the last year.
  • The U-6 unemployment rate, which includes many classes of jobless/underemployed workers ignored by the headline U-3 number (3.6% last month), fell to 7.1% in May. That is the lowest reading in the current expansion and a full point below where it was in January 2019.

Takeaway: as mentioned in the Markets section, we worry that companies will begin to trim employment levels to address a slower/less certain macro environment, but the data here shows that has not yet started to happen.

#3: While overall wage growth may have been slightly disappointing, hourly earnings for production/nonsupervisory workers remain solid:

  • May’s wage growth for this group was +3.4%, the same as the YTD average.
  • You have to go back to the very end of the last expansion (Q1 2009) to find higher annualized wage growth for this group.

Takeaway: good news/bad news here. On the plus side, there’s no sign that wages are signaling a decline in labor market conditions. The down side, and similar to the prior point, how long will companies increase wages by 3-4% in the face of zero earnings growth?

Bottom line to all this: about the only “scary” number in the May Jobs Report was the 75,000 headline print, and even that speaks more to US labor market stasis than erosion. This is why Fed Funds Futures only put 25% odds on a rate cut in 9 days time (the next FOMC meeting). Now, if the next report has a negative number – something that hasn’t happened since September 2010 – then we have a new situation to address.

Given how aggressively futures have priced in rate cuts over the past week, June’s report may well start with a minus sign, or something very close to zero. Again, we don’t see much in the May report that presages such a shift. But to keep the market’s belief that the Fed is about to methodically lower rates, this is the headline that keeps that narrative on track.