Inside Last Week’s Disappointing Jobs Report

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Last Friday’s Employment Situation reports from the Department of Labor were universally called “disappointing”. I don’t give a lot of weight to these monthly reports, but they generate a lot of media attention. So, this week let’s take a deeper look at the latest reports.

The disappointment in the report was that only 38,000 new jobs were created for the month. That’s well below expectations and the recent trend of 150,000 or more per month. Also, the previous month’s new jobs number was revised lower from 160,000 new jobs to 123,000. The unemployment rate fell significantly from 5% to 4.7%. But that disappointed many people because the decline was due to a large drop in labor force participation, not from new job creation.

The first reason not to give too much weight to the report is that it is a lagging indicator of the economy. Businesses tend to make employment decisions after examining the other data they have. Regular readers of these weekly reports know that at the start of the year and early spring, the economic data showed that the economy was slowing. Growth still was positive, but it was slower than in late 2015. Employers responded to that by hiring fewer new workers as the year went on.

In more recent data, the economy is looking better. Housing’s growth rate increased. The decline in manufacturing is slowing and might have stopped in a few regions. Retail sales have increased, and overall the service sector of the economy still is growing, though at a slower rate than in 2015. So, I expect the employment reports to improve in a few months.

Of course, there are my usual complaints about the Employment Situation reports. They’re based on estimates and surveys, and they are subject to revisions. The reports tend to be volatile from month to month. Several months need to be viewed together before attempting to draw a conclusion. There are a number of other reports during the month that include employment data. The Department of Labor reports need to be tempered by the other reports. The other reports don’t show as dramatic a decline in hiring as the Department of Labor reports.

Finally, the overall health of the labor market must be considered. The employment rate is very low. Monthly jobs growth of less than 100,000 is needed at this point to keep the unemployment rate from rising. There is room for new jobs because of the large number of people who are employed part-time but would like to work full time. But at this stage of the economic cycle, the economy is unlikely to add 200,000 jobs per month on a regular basis.

I also don’t make much of the drop in the participation rate. That rate is volatile from month to month. It increased the last few months. Taking recent months together, there hasn’t been much of a change. Plus, participation has been in a long-term down trend primarily because of demographic changes in the work force.

The employment data lags real economic activity. The report is consistent with economic data we saw earlier in the year. But it does have positive components and must be considered along with other labor market reports for the month. The labor reports should improve in the coming months to be consistent with more recent economic data we’ve seen.

The Data

Two reports this week painted a more positive picture of the labor market than last Friday’s reports.

The JOLTS (Job Openings and Labor Turnover Survey) found that job openings increased again (though the previous month’s number was revised down a bit). The layoff rate also declined and is near all-time lows. Even so, employers reported hiring fewer workers. That could be due to an inability to find the workers they want for job openings but also due to caution following the negative environment that started the year. Also, the quits rate declined a tenth of a percent. The quits rate is considered a sign of the labor market’s strength. If workers are shopping their skills to other employers, that shows they have confidence in the labor market and their ability to find better jobs.

New claims for unemployment declined by 4,000. That brings the four-week average back below 270,000 and approaching the record low below 260,000.

The service sector of the economy reduced its growth rate in May. The PMI Services Index declined from 52.8 to 51.3. That is up one-tenth of a point from the mid-month flash index. The ISM Non-Manufacturing Index took a steeper drop, from 55.7 to 52.9. Both reports are above 50, which indicates the service sector of the economy continues to expand.

The headline number for Factory Orders was positive and increased 1.9%. The previous month’s rise was revised higher from 1.1% to 1.7%. Even so, the key component of the report is business investment in core capital goods, and this was negative. Businesses simply aren’t investing in new equipment or making other plans to accommodate growth.

While retail sales recently increased, households didn’t finance the extra spending with credit. You might recall that March had an especially strong increase in consumer credit, especially the use of revolving credit such as credit cards. That didn’t continue into April. Consumer credit rose, but by less than half the previous month’s amount. Plus, most of the increase was in the usual vehicles loans and student loans. Credit card use increased very modestly. Households appear to have funded the spending surge from savings.

There was another warning about profit margins in the second estimate of first-quarter Productivity and Costs. Productivity declined by 0.6%, which is better than the initial 1% estimate. While output increased, hours worked increased even more. In addition, compensation increased by 3.9%. The result was an estimated 4.5% increase in unit labor costs.

The Markets

Stocks had another positive week. The S&P 500 rose 1% in the week ended with Wednesday’s close. The Dow Jones Industrial Average rose 1.31%. The Russell 2000 rose 2.29%. The All-Country World Index rose 1.86%. Emerging market equities did best, rising 5.14%. In the emerging markets, Latin American equities did better than Asian equities in the latest week.

Long-term Treasury bonds rose 2.19%. Investment-grade bonds gained 1.25%. Treasury Inflation-Protected Securities (TIPS) rose 1.62%. High-yield bonds rose 1.48%.

The dollar lost 1.90%.

Energy-based commodities had a big week, rising 4.37%. Broad-based commodities had a bigger week, gaining 5.21%. Gold also did well, jumping 4.37%.

Some Reading for You

Howard Marks of Oaktree Capital devoted his recent investor memo to discussing some basic economic ideas that too many people don’t understand.

Bloomberg.com reports about a secret Treasury bond deal made in the 1970s between the United States and Saudi Arabia.

The consulting firm McKinsey and Co. operates a private investment partnership that no one outside the company knew about until this report.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.