Weak job growth in May has dealt an “employment curveball” to the U.S. economy, says Robert Bach, director of research for the Americas at Newmark Grubb Knight Frank. But the longtime economist is quick to add that the latest report from the U.S. Bureau of Labor Statistics (BLS) is an “outlier among a recent string of positive economic news,” including an uptick in both consumer spending and housing prices and a drop in weekly jobless claims.
Employers added a meager 38,000 net new payroll jobs last month, according to the BLS, far below the 160,000 jobs forecasted in Bloomberg’s survey of economists. Revisions to March and April data subtracted a combined 59,000 jobs, revealing a three-month trend of slowing job growth. Over the past three months, job gains have averaged 116,000 per month.
“If the report is not a quirk, then it suggests the economy, specifically the labor market, may be losing momentum,” says Bach. Employers could be reacting to falling profits and labor productivity, which have been under pressure for some time. It’s also possible that recent hikes in the minimum wage are restraining job formation — although restaurants would be among the first employers to feel the pinch, and their hiring was solid last month.”
Ryan Severino
The current economic expansion began in June 2009, according to the National Bureau of Economic Research. “Even if there is a bit of a slowdown, it wouldn’t be out of character given how far into this expansion the slowdown is,” says Ryan Severino, senior economist and director of research at New-York based Reis.
“Most recoveries are over by this point,” emphasizes Severino. “We are either at or at least near full employment, so seeing a bit of a slowdown makes sense. That’s not to say we couldn’t bounce back from this, but I think maybe the slowdown says more about how strong job creation had been this far into an economic recovery than it does about the slowdown itself.”
Highs and Lows in May
A strike by Verizon workers subtracted about 35,000 jobs from the information sector in May, Bach points out. “The weakness was widespread, however, as more sectors lost jobs than added them, and most of the sectors that added jobs did so at a muted rate.”
The exception once again was education and health services, which added a robust 67,000 jobs, of which 45,700 were in healthcare. Other sectors that added jobs included restaurants (+22,000), government (+13,000), retail trade (+11,400), professional and business services (+10,000), and financial activities (+8,000).
Besides information, other employment sectors that lost jobs included temporary help (-21,000), construction (-15,000); mining and logging (-11,000); wholesale trade (-10,300); and manufacturing (-10,000).
“Manufacturers and energy producers (part of mining and logging) have been under pressure for some time,” says Bach. “The weakness in construction is likely due to warm weather earlier in the year, which pushed hiring forward. The decline in temp services is somewhat concerning because temp jobs are the first to disappear when the economy slows.”
The unemployment rate fell unexpectedly from 5 percent to 4.7 percent as 458,000 people left the labor force, the second straight month in which the labor force declined sharply, according to Bach. As a result, the labor force participation rate sank back to 62.6 percent.
The number of persons employed part time for economic reasons — the so-called involuntary part-time workers — increased by 468,000 to 6.4 million in May after showing little movement since November.
In isolation, the number of involuntary part-time workers isn’t a concern, says Severino. “Taken together with the rest of the weakness in the report, it is a bit worrisome. Yet overall, the labor market remains healthy so I’m not getting spooked yet. If we’re still seeing weakness after a few more months, then we know we have a different situation and more caution would be warranted.”
Fed Delays Rate Hike
Calling the weak May jobs report “disappointing,” Federal Reserve Chairwoman Janet Yellen signaled on Monday that the Fed would wait at least a month before deciding whether to raise interest rates. The Federal Open Market Committee (FOMC), the monetary policymaking body of the Federal Reserve System, is scheduled to meet June 14-15.
The last interest rate hike occurred in December 2015 when the FOMC raised the federal funds rate 25 basis points, the first such increase in nearly 10 years. The federal funds rate is the interest rate banks charge each other for overnight loans to meet their reserve requirements. This key interest rate currently ranges between 0.25 percent and 0.50 percent, following the quarter-point increase last December. It previously ranged between 0 and 0.25 percent.
Mixed Economic Signals
U.S. consumer spending recorded its biggest increase in nearly seven years in April, with the purchase of automobiles playing a big factor. The Commerce Department said consumer spending, which accounts for more than two-thirds of U.S. economic activity, surged 1 percent in April as households bought a range of goods and services. It marked the largest increase since August 2009 and beat economists’ expectations for a 0.7 percent rise, according to Reuters.
Meanwhile, personal income increased 0.4 percent in April after rising by the same margin in March.
On the housing front, prices in the S&P/Case-Shiller 20-City Index were 5.4 percent higher in March than a year earlier.
Robert Bach
Initial claims for state unemployment benefits declined 4,000 to a seasonally adjusted 264,000 for the week ended June 4, according to the U.S. Labor Department. Claims have been below 300,000 for 66 straight weeks, the longest streak since 1973.
However, the employment component of the ISM Non-Manufacturing Index fell below 50 in May, which indicates contraction and suggests to Bach that the BLS employment report for May wasn’t a fluke.
“I can’t help but think job creation will bounce back in June because other key sectors of the economy such as housing and consumer spending are doing well,” says Bach. “But it makes me wonder if a combination of weak profit growth and growing risk aversion due to the election campaign is taking a toll. I suspect companies are delaying expansion plans until the elections are decided, and it could be showing up in the hiring data.”
Severino characterizes the U.S. economy as good, but not great. “The economy is still growing and creating jobs, even if the pace of improvement is not as rapid as we would ideally like. I think that’s okay for commercial real estate right now. In this environment, rents will continue to grow and vacancies will continue to decline.”
— Matt Valley