May Jobs Report
…223,000 new jobs. 3.8% unemployment rate. Wages slightly higher. Good report. Premature disclosure.
Financial Review by Sinclair Noe for 06-01-2018
DOW + 219 = 24,635
SPX + 29 = 2734
NAS + 112 = 7554
RUT + 14 = 1647
10 Y + .07 = 2.89%
OIL – 1.33 = 65.71
GOLD – 4.80 = 1294.10
The economy added 223,000 new jobs in May. The unemployment rate dipped from 3.9% to 3.8%, an 18 year low. The increase in hiring — the biggest in three months — topped expectations for 190,000 new jobs. The government said 159,000 new jobs were created in April instead of 164,000. March’s increase was raised to 155,000 from 135,000. For a net gain of 15,000 jobs in revisions. Over the past 12 months, the economy has added 2.36 million jobs. For the first five months of 2018, job growth has been solid averaging just over 200 thousand per month. May was the 92nd consecutive month of job creation, extending the longest streak of job growth on record.
Hiring was broad based. Retailers led the way in hiring by adding 31,000 new jobs. Health-care companies boosted payrolls by 29,000, construction firms took on 25,000 workers and manufacturers increased employment by 18,000. Government added 5,000 jobs, which isn’t much but for several years there was attrition in the public sector. Steady hiring by construction and manufacturing companies is particularly surprising. They are the among the industries that have complained the loudest about a shortage of skilled workers. Transportation and warehousing gained almost 19,000 jobs. The Fed’s Beige Book economic survey cited trucking as an industry experiencing labor shortages.
Average hourly earnings for all employees rose by 8 cents to $26.92. Over the year, average hourly earnings have increased by 71 cents, or 2.7 percent. That was a little better than last month, but not so strong that it would be considered inflationary. A tighter labor market should prompt employers to raise salaries to keep the workers they have and lure new ones, at least in theory. But we have seen only modest wage increases. Everything from slow productivity growth to the decline of unions and digital disruption has been cited as a reason for slow wage growth. Employers complain about a lack of skilled labor but still wages remain stagnant for the most part. This is yet another indication that there is still slack in the labor market. The demand for jobs is not strong enough to pull people off the sidelines, at least not yet. In some regions, workers have grown particularly scarce, forcing companies to pony up to compete for new hires. The economy overall is good for many job seekers, including recent grads and professionals looking for a new career path. While wage growth may be slow, now is a good time for workers to take advantage of other benefits employers are offering, like additional training support and tuition assistance. Where employers are seeing a shortage of workers, they are biting the bullet and providing some sort of training.
The Labor Force Participation Rate decreased in May to 62.7%. This is the percentage of the working age population in the labor force. And this explains why the unemployment rate dropped – there were fewer people in the labor pool – about 170,000 dropped out. While the unemployment rate may have moved in the right direction last month, it went down for the wrong reason, a reduction in the size of the labor force. Still, the ratio of the adult population that is employed ticked up to 60.4 percent, which only matches its recent high earlier in the year.
The U-6 unemployment rate dropped to 7.6% in May. U-6 includes unemployed plus under-utilized workers, or people working part-time who would prefer full-time work. U-6 is now at its lowest level since 2007. For millions of Americans, the security and income of a steady full-time job is still out of reach. A recent Federal Reserve survey found that about 31% of adults participate in what the Fed called “the gig economy” — work done outside of regular employment structures. That looks huge — about 78 million people. And while the idea of moonlighting, or a second (or even third) source of income, has been around a long time – it serves as a reminder that the labor market is not quite as robust as it seems at 3.8% unemployment.
While more Americans sure could use a bigger raise, the relatively slow growth in wages does have a plus. Inflation is still rising slowly enough that the Fed doesn’t have to rapidly jack up interest rates. A higher cost of borrowing would be especially felt by Americans seeking to buy a new car or home. Still, the strength of today’s jobs report almost guarantees a rate increase from the Fed at the June 13th FOMC policy meeting. It does not guarantee 4 rate hikes this year, but it increases the probability, and that was reflected in the Treasury market today as the yield on the 10-year note moved back up to 2.89%.
There are still multiple challenges, including possible trade wars and geopolitical risks, but the thing to take away from the May numbers is that the United States economy just keeps humming along at a steady pace, putting more people to work and at gradually higher wages. It isn’t perfect — wage growth remains unexceptional despite its growth spurt in May, and the ratio of prime-age adults working remains below its historical levels. But the economy keeps adding jobs, and when people have jobs, they spend more money, and the economy grows.
In an unusual and controversial move, nine minutes before the release of the nonfarm payroll data, Trump tweeted: “Looking forward to seeing the employment numbers at 8:30 this morning.” The tweet did not provide specific details or numbers on the jobs report, but it did express positive expectations. And 9 minutes later, the numbers were indeed better than expected.
The White House’s Chief Economic Advisor receives the jobs data from BLS around 1 p.m. on Thursday before the official release. The CEA chair then typically walks the number to the president in the Oval Office later in the afternoon or calls the president on the road. BLS also provides the data on Thursday to the chair of the Federal Reserve, the Treasury Secretary and the director of the NEC, in this case Kudlow. All are under strict guidance to saying nothing at all about the figures until one hour after their release. The jobs report data is governed by rules issued by the White House Office of Management and Budget including the provision that officials wait an hour after the data is publicly released to say anything.
Trump’s premature tweet seems to have impacted financial markets, with a small spike in 10-year Treasury yields and the dollar. To put this into a little context, the government launched an investigation when it was revealed that some media organizations were able to get this information to traders a few thousandths of a second before their rivals could. It was a big deal when Bloomberg and others did it a nanosecond early, and it’s a big deal when the president of the United States does it an hour early. Perhaps the funniest part of the whole thing is that he is now so excited about Bureau of Labor data that he can’t even wait until it’s released to tweet about it. During a press conference in 2015, Trump said the unemployment rate, then at 5.1%, was too low to accurately capture the real economic situation in the country. He called it “such a phony number” and he said, “the number isn’t reflective … that is the biggest joke there is in this country … The unemployment rate is probably 20 percent, but I will tell you, you have some great economists that will tell you it’s a 30, 32. And the highest I’ve heard so far is 42 percent.” That, of course, was just completely wrong. And at various other times, Trump has tweeted that the jobs report was wrong or fake or phony or fiction. He has misrepresented labor force participation and average hourly earnings. The jobs report is not perfect, but it is the best read we have of the most important part of economic data we can measure. White House spokespeople tried to claim the tweet was not inappropriate; and while it probably isn’t illegal, it certainly was unnecessary, and it was definitely wrong.
A couple of other economic reports today, including the Institute for Supply Management’s Manufacturing survey. The ISM manufacturing index rose to a reading of 58.7%, up 1.4 percentage points from April and a two-month high. Of the 18 manufacturing industries, 16 reported growth in May.
The Commerce Department reported construction expenditures were 1.8% higher in April compared to March. The April spending pace of $1.31 trillion, seasonally adjusted, was 7.6% higher than a year ago. While the monthly spending rates are often revised, expenditures for the first four months of the year are 6.6% higher than the same period in 2017.
Put together, the data helped fuel expectations that first-quarter growth of 2.2 percent will be the low-water point of 2018. Economists are slowly ratcheting up expectations for growth through the end of the year, with widely followed measures putting the second quarter at between 3.6 percent and 4.8 percent.
Wall Street liked the jobs report; a Goldilocks report – not cold but not too hot – just about as good as we could hope for. Stocks moved higher and held gains.