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United States Unemployment May 2019

United States: Feeble payroll gains in May highlight market concerns about slowing economy

The May jobs report released by the Bureau of Labor Statistics (BLS) indicated weak payroll increases in the month, renewing investors’ concerns about a slowing economy and solidifying market expectations that the Fed may cut interest rates sooner than previously expected to keep the expansion running. Non-farm payrolls increased a meager 75,000 in May, down from the revised 224,000 reported in April (previously reported: +263,000) and way below the 180,000 expected by market analysts. In total, revisions to past months’ data subtracted a net 75,000 jobs, nullifying this month’s print. Nevertheless, the three-month average payroll gains still came in at a respectable 150,000, above the 100,000 needed to absorb new entrants in the workforce.

Looking at the details, the May report showed broad-based weakness, contrasting the previous month’s strong gains. Payroll increases in the service sector more than halved compared to April, while employment growth in goods-producing industries slowed to a near standstill, and the government sector shed a sizable number of jobs.

The weak service sector showing came largely on the back of a sharp slowdown in education and health services, as well as professional and business services, which together still accounted for over half of service sector job gains. Meanwhile, the sectors of retail trade, transportation and warehousing, and information services shed jobs in the month. On the flipside, only the leisure and hospitality sector picked up pace in May. Turning to the industrial sector, the slowdown was driven by feeble gains in construction after a strong April print; however, the reading may have been affected by adverse weather conditions in the Midwest. Moreover, momentum in manufacturing remained anemic, as in past months.

Meanwhile, the unemployment rate was stable at April’s 3.6% in May—below expectations of 3.7%—as was the labor force participation rate at 62.8%. Earnings data was again relatively soft in the month, with hourly earnings increasing 0.2% month-on-month and annual wage growth ticking down to 3.1%, down from April’s reading and market expectations of 3.2%.

Overall, according to Jan Hatzius, chief U.S. economist at Goldman Sachs, the numbers from this month’s job report “raise the question whether the job market is starting to falter amid slower output growth and a significant increase in tariff-related uncertainty following the collapse of US-China trade talks last month”. Nevertheless, he says now is not yet the time to panic, as trend job growth and other labor market indicators still look reasonably healthy, as do business and consumer survey readings. In his view, “beyond the short-term fluctuations, we expect the underlying trend of job growth to slow gently toward the breakeven pace [of 100,000], with some further declines in the unemployment rate over the next year. This assumes that the trade war will remain a source of uncertainty, but will not spiral out of control with sharply tighter financial conditions and large spillovers to business behavior.”

Turning to the monetary policy implications, this month’s release made the upcoming FOMC meeting more interesting, according to Michael Feroli, chief U.S. economist at JPMorgan: “There will be some Fed officials who argue for an ease at the upcoming June 18-19 FOMC meeting. And not without reason: growth is slowing, trade risks are rising, and inflation threats are absent. Even so, we think the most likely outcome of that debate is to adopt a watchful waiting posture. We still look for cuts in September and December, though risks are skewing toward sooner and more.”

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