Economists seem to agree that the weak May jobs report means a summer rate hike is off the table, which marks an incredible shift from the last week or two when multiple firms said one was pretty much guaranteed. Both payrolls and the ISM manufacturing data disappointed last week, and now talk of recession is creeping back into the economic conversation.

Despite the disappointing jobs reports last week, economists are trying to reassure investors that the U.S. economy isn’t in that bad of shape, but there’s no denying that the economic data we’re seeing is very mixed indeed.

Summer rate hike – Jobs report suggests no June rate hike

The U.S. economy added only 38,000 jobs last month and revised downward the April and May numbers by 59,000, net.

Summer rate hike Source: Capital Economics
Summer rate hike Source: Capital Economics

Further, the Manufacturing sector shed 10,000 jobs, while Construction lost 15,000 jobs. Temporary help saw a 21,000-job decline, while jobs in the Information sector declined 34,000, although economists generally expected that because striking Verizon workers account for most or all of that decline.

Capital Economics Chief U.S. Economist Paul Ashworth said in a report dated June 3 that he expects the strikers to be back at work in June, so that should provide a boost to jobs for this month. He noted, however, that even when adding the Verizon workers back into the jobs total, it would still mean that the U.S. added only 73,000 jobs in May, compared to the consensus of 160,000 and his estimate of 120,000.

Despite the weakness in payroll additions, unemployment fell from 5% to 4.7%, but this was because the labor force shed 458,000 workers. Ashworth adds that the household employment survey showed an increase of 26,000 jobs. Further, the participation rate plunged to 62.6%, marking the lowest level in five months.

Summer rate hike – Next rate hike in September?

UBS economist Maury Harris and team said in a report dated June 3 that they still expect the next rate hike to come in September. Other firms were calling for a rate hike this month or next before last week’s jobs reports. Ashworth agrees that the next rate hike could be delayed to September thanks to May’s payroll weakness.

According to Harris, the Fed said the first quarter’s spending weakness was exaggerated because of the downward trend in gross domestic product and temporary financial market pressure. He adds that the second quarter spending report appeared to support the Fed’s expectation for it to rally, but counters that the May jobs report and ISM data suggest that spending may not rally in the second quarter.

“We do expect reversal of the latest employment and ISM weakening,” the UBS economist wrote. “But it will take some time for that reversal to be believable.”

Summer rate hike
Summer rate hike

He still expects the Fed to hike rates twice this year, with the first coming in September and the second in December.