The Fed released its quarterly report on US Household Net Worth and, at the end…
“April showers bring May flowers.” The idea that enduring a little rain will inevitably lead to sunshine helps us to endure the less-than-favorable events that sometimes blight our lives. But, sometimes a little shower is the precursor to a deluge (just ask Texas this week). It’s with this in mind that we digest an awful jobs report for May, released on Friday. Following April’s tepid 160,000 jobs gain (which was revised down to only 123,000 new jobs), the US economy added a paltry 38,000 non-farm payroll jobs in May. If these figures aren’t revised again, April & May would be the slowest two-month period for job growth in more than five years. Meanwhile, the Household Survey (an alternative measure of jobs that includes small-businesses and start-ups, from which the unemployment rate is derived) rose only 26,000 in May.
If the only numbers in the employment report were the jobless rate falling to 4.7% and hourly wages rising at a 3.2% annual rate in the past three months, you’d think it was good news. But, even when we factor-in the Verizon strike and some negative effect from weather, job creation was still pretty weak. In addition, the labor force fell 458,000 in May, resulting in a decline in the labor force participation rate back down to 62.6%. That’s why the unemployment rate fell to 4.7% in spite of soft job creation.
The report brought the boo-birds back to life and cries of a pending recession echoed around the investment community. There were outright sneers directed at the Fed for having proclaimed just a week ago that the US recovery was “on track.” Once again, before you join the bears on the ledge, keep in mind that the jobs numbers are often revised (often substantially). Back in August 2011, job gains were reported as zero initially, but since revised to up 107,000. In addition, the job trends over the past year remain solid, including non-farm payroll gains of 200,000 per month and household survey gains of 190,000 per month, with the labor force up 1.1 million over the past year.
In addition, ADP (the payroll company) puts out a monthly employment report a few days before the government report. As you can see on the chart below, both indices tend to track each other over time. This past Wednesday, ADP reported 173,000 new jobs in May – far above the government report which tends to be more volatile in the monthly swings than ADP. If the past is any guide, we may see substantial revisions to the weak government reports of the past two months.
The best news in the jobs report was the continued gains in workers’ earnings – this despite many highly-skilled and highly-paid Baby Boomers retiring. Total wages, which reflect gains in both average hourly earnings (excluding fringe benefits and irregular bonuses & commissions) and the
number of hours worked, were up 0.3% in May and are up 4.2% versus a year ago. This is more than enough to keep pushing consumer spending upward (see April report below).
While a “tight” labor market is not necessarily a “strong” or “good” labor market, an unemployment rate of 4.7% does signal labor market “tightness.” This means companies have to bid up wages at an accelerating trend to find the workers they want to hire. That correlates with wage data over the past year.
On the manufacturing front, the Institute for Supply Management (ISM) manufacturing survey saw its third straight monthly gain (to 51.3 in May from 50.8 in April). Orders remained strong while inventories continued to decline, which suggests further growth in the months ahead. The two most forward looking measures, new orders and production, slowed somewhat in May, but remain comfortably above 50, signaling expansion. Fourteen of eighteen industries surveyed reported growth in new orders, while four, including petroleum and coal, reported declines. Production tells a similar tale, with twelve of eighteen industries reporting growth. On the inflation front, the prices paid index jumped 4.5 points to 63.5 after surging 20.5 points in the prior two months. Rising energy and metal prices led thirteen of eighteen industries to report higher input costs. As a whole, today’s data show manufacturing activity moving in the right direction. It isn’t booming, but it should continue to plod forward at a modest pace.
Meanwhile, the much larger US service sector continued to grow in May, but at a slightly slower pace. The ISM Non-Manufacturing index came in at 52.9 from 55.7 in April. Fourteen of eighteen industries surveyed by the ISM reported expansion, while just four – including mining and educational services – reported contraction. Overall activity expanded in the service sector for a 76th consecutive month, and continued strength in both new orders and business activity show positive signs for the months ahead. And while both the new orders and business activities indexes declined in May, both remain comfortably above 50, signaling continued expansion. Taken together, growth prospects remain positive with no sign of a looming recession. Mirroring the disappointing jobs report, the employment index fell to 49.7 in May, despite eleven of eighteen industries reporting rising employment (with six reporting reductions). On the inflation front, the prices paid index rose for a second consecutive month, with rising prices for fuels and paper products more than offsetting declines in prices for beef, eggs, and metals. Rising energy prices have pushed the major inflation indicators higher in recent months, led by the recovery in oil prices. Even if oil prices level out here, inflation will approach the Fed’s 2% inflation target faster than many market participants are expecting.
Construction Spending declined 1.8% in April, but was balanced somewhat by upward revisions to prior months which added 1.5% to prior growth. The decline in April was due mainly to housing, highways and street construction. There was growth in spending on offices and public safety.
Personal Income rose 0.4% in April, led by solid growth in private-sector wages and salaries, which rose 0.5% in April and are up 5.7% from a year ago. Overall personal income was actually up 0.8% for the month when we add in upward revisions to prior months. Over the past year, income is up 4.4% – well ahead of spending.
Speaking of which, Personal Consumption jumped 1.0% in April. Consumer spending is up 4.1% from a year ago. On the inflation front, the PCE deflator, the Fed’s favorite inflation measure, increased 0.3% in April. Although it’s only up 1.1% from a year ago, it was up only 0.2% in the year ending in April 2015, so inflation is accelerating. Meanwhile, the “core” PCE deflator, which excludes food and energy, is up 1.6% from a year ago. That’s also below the Fed’s 2% inflation target, but we expect continued acceleration in the year-to-year change in the months ahead.
On the housing front, the national Case-Shiller house price index increased 0.1% in March and is up 5.2% in the past year, which is an acceleration from the 4.3% gain a year ago (for the year ending in March 2015). Price gains in the past twelve months have been led by Portland, Seattle, and Denver.
For the week, stocks held relatively steady. However interest rates sank on Friday after the jobs report. Bond traders quickly reversed their view on Fed rate hikes, with the futures market dropping the odds for a June hike to under 5% from 34% just over a week ago. The odds for a July hike are now down to 30% and will depend heavily on the June jobs report, released on July 8, and the markets will be assessing the results of June 23’s Brexit vote on whether the UK will remain in the European Union. For now, the odds of a pending recession this year – while up a tad – remain low, and deflation concerns have all but vanished. However, another weak employment report will force us to re-assess our outlook.