Financial Review

May Jobs Report

…..Dow, S&P, Nasdaq hit record highs. The economy added 138,000 jobs in May – below expectation. Unemployment rate drops to 4.3% – because people fall from labor market. U6 down to 8.4%. Wages show small gains. Employers lament and the solution. Fed on glide path to raise rates in June.


Financial Review by Sinclair Noe for 06-02-2017

DOW + 62 = 21,206
SPX + 9 = 2439
NAS + 58 = 6305
RUT + 9 = 1405
10 Y – .06 – 2.16%
OIL – .56 = 47.80
Job growth slowed in May. The economy added 138,000 jobs. The unemployment rate dipped to 4.3%.  Employment gains in the prior two months were not as strong as previously reported. May’s job gains marked a sharp deceleration from the 181,000-monthly average over the past 12 months, and missed consensus estimates. In the first five months of 2017, the U.S. has added an average of 162,000 jobs a month. That’s down from 187,000 in 2016 and as many as 250,000 a month in 2014, a post-recession high. Under the Trump administration, the economy has added 594,000 new jobs, or an average of 148,000 per month.


The economy created 66,000 fewer jobs than previously reported in March and April. The government cut its estimate of new jobs created in April to 174,000 from 211,000. And March’s gain was reduced to 50,000 from 79,000. Over the last three months, the United States added an average of only 121,000 jobs — the lowest three-month average since 2012.


The unemployment rate fell one-tenth of a percentage point to its lowest level since May 2001. It has dropped five-tenths of a percentage point this year. Last month’s decline came as people left the labor force. The survey of households from which the jobless rate is derived also showed a drop in employment. The number of people who reported themselves as having a job dropped by 233,000. Meanwhile, the number of people not in the labor force at all, neither working nor actively looking for work, soared by 608,000.


The average workweek for all employees on private nonfarm payrolls was unchanged at 34.4 hours in May. In manufacturing, the workweek also was unchanged at 40.7 hours, while overtime edged up by 0.1 hour to 3.3 hours. In May, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents to $26.22. Over the year, average hourly earnings have risen by 63 cents, or 2.5 percent. That was only slightly above the 2.2% annual increase in the consumer price index.


The U.S. has created more than 16 million new jobs since 2010 to push the unemployment rate down to a 16-year low, but the strongest labor market in years still hasn’t translated into much bigger paychecks for Americans workers. Wages typically grow an annualized 3% to 4% when the economy is strong and the unemployment rate is as low as it is now at 4.3%. Business complaints of labor shortages have become increasingly widespread. The shortfall of skilled workers available for hire might even be a chief cause of the recent slowdown in hiring, however most employers haven’t figured out that paying higher wages might pull qualified workers off the sidelines. New claims for unemployment benefits remain below 240,000 – on a 4-week average – and that indicates employers are reluctant to let people go because they fear that they won’t be able to rehire them later if needed, because the labor market is so tight – but still unwilling to train potential new workers. This is likely one of the first real signs we have seen that the labor market is nearing full employment. It doesn’t mean we are there yet, just that we are getting closer to seeing the balance of power shift from employers to workers, ever so slightly.


The quality of available jobs is crucial, not just the quantity. For employers unwilling to train and unwilling to pay better wages, look for continued difficulty filling jobs. Also, there are large segments of the population that are constantly overlooked for jobs they are qualified to fill. The point here is that we are not at full employment, not yet.


One negative sign was that the labor-force participation rate dropped, to 62.7 percent, a sign that sidelined workers were not rejoining the labor force. That’s always ugly. The overall participation in the labor force has hovered just below 63 percent during the recovery, down from over 66 percent before the recession. But the small gains that had been made were knocked off this month, suggesting that when workers drop out of the labor market, they stay out. Of course, a big reason for the low labor-force participation rate is demographics; baby boomers are retiring. Looking at the labor-force participation rate for people age 25 to 54, the prime working years, the ratio fell to 78.4 percent from 78.6 percent, but it is still plausible that it could rise back to its levels above 80 percent before the 2008 recession, or even to its record highs near 82 percent back in 2000.


A broad measure of unemployment, U6, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, fell two-tenths of a percentage point to 8.4 percent, the lowest since November 2007. The number of long-term unemployed was essentially unchanged over the month at 1.7 million.


The leisure and hospitality industry added 31,000 net new jobs in May, down from 58,000 the previous month. Healthcare and social assistance providers increased their payrolls by 32,300 after a 44,900 gain in April.Education added 23,000. Employment in professional and business services continued to trend up (+38,000). Construction companies increased their payrolls by 11,000. The most notable weakness was among traditional retailers that continue to lose ground to internet rivals; 6,100 retail jobs lost last month. They cut jobs for the fourth straight month and the retail sector has now lost jobs in 6 of the last 8 months. Over the past four months, non-store retailers (mostly online sellers) have added 12,500 jobs while the rest of the sector has cut 92,600. Department stores alone have cut 18,600 jobs in that period. Manufacturing dropped 1,000 jobs. Government lost 9,000 workers.


Among the major worker groups, the unemployment rate for Whites edged down to 3.7 percent in May. The jobless rates for Blacks (7.5 percent), Asians (3.6 percent), and Hispanics (5.2 percent), as well as those for adult men (3.8 percent), adult women (4.0 percent), and teenagers (14.3 percent), showed little or no change.


The Federal Reserve probably will not change their current glide path because of today’s weak jobs report. The Fed has already indicated they plan to hike rates 25 basis points at the June 14th FOMC meeting. To change, would raise a red flag that something is wrong with the economy. So, they go forward in June with no surprises for the market; that would be their second rate hike of 2017. The Fed has indicated they will raise rates 3 times this year. That likely means another rate hike in September. Still, for now, we are seeing inflation trending below the Fed’s 2% target. The continuing low unemployment rate – more than a year without breaking the 5 percent mark – will only sharpen the debate over how close the labor market is to capacity, or full employment. And while 4.3% unemployment is a strong number, we know there is still slack in the labor market, particularly reflected in stagnant wage growth. Still, at this point in the very long recovery, the economy only needs to gain about 100,000 jobs per month to absorb population growth and maintain current unemployment rates, and that should be enough for the Fed to continue with a third rate hike this year. And if you’re keeping score we have 80 straight months of job gains – the longest streak on record.


Nearly 9 years into one of the longest economic expansions in history, we probably need to lower expectations. There is slim chance the economy will consistently post job gains over 200,000. Today’s numbers were weak, even a little ugly but the trend is still positive. Corporate earnings have been strong, very strong in the first quarter – even as first quarter GDP came in with an anemic 1.2% rate, we look forward to better GDP growth in the second quarter. Forget about Washington delivering a jolt of economic stimulus. Forget about the Fed hiking rates. That’s all baked into the cake. The big question is whether businesses are willing to invest in jobs. If business invests in workers, workers invest in American businesses.



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