May Jobs Report
The jobs report disappointed for the second consecutive month, as the 38,000 jobs created fell well short of the 158,000 expectation. Surprising given the shortfall in the jobs number, the unemployment rate declined from 5% to 4.7%. Furthermore, figures for both April and March were revised lower by a combined 59,000, bringing the three month average to 116,000 jobs created. This is significantly lower than the 229,000 monthly average in 2015, which brings to light two main questions: Is this a sign of the U.S. economy slowing, and will the Federal Reserve raise interest rates next week?
From October 2015 to this past March, the economy averaged job growth of approximately 240k per month. Given the recent three month average of 116k jobs, it is right to question whether the U.S. economy is slowing down. However, as we discussed in last week’s blog, other economic indicators, such as housing, retail sales and industrial production have been positive surprises over the past several weeks. Although to miss by such a wide margin is disappointing, we need to focus on the bigger picture beyond just jobs created, especially since the 4.7% unemployment rate is below the Fed’s full employment estimate of 5% and below the 60-year average of 6.2%. Therefore, we do not believe the decline in jobs created is indicative of an overall slowdown in the US economy.
Wage growth was the lone bright spot in the report, which grew at a 0.2% pace for the second consecutive month. Although the year-over-year growth of 2.5% matched April as well, wages have grown by 3% over the past six months, marking the fastest six month pace since the start of the recovery seven years ago. This could be a sign of inflationary pressures starting to form, but more importantly, can be supportive of consumer spending. We believe this is important, since spending accounts for approximately 70% of U.S. GDP. It may also be an indicator for the Federal Reserve to raise their short term rate later this year, although the potential for a rate hike at next week’s meeting has declined significantly.
We will continue to monitor the job market to see if the recent disappointment is indicative of a longer term declining trend. However, our expectations have not waivered for a pace of steady economic growth as we head into the second half of 2016.