Pathetic May Unemployment Report – New Questions About US Economy by Gary D. Halbert
Unemployment Report – FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 7, 2016
IN THIS ISSUE:
Seth Klarman: Investors Can No Longer Rely On Mean Reversion
"For most of the last century," Seth Klarman noted in his second-quarter letter to Baupost's investors, "a reasonable approach to assessing a company's future prospects was to expect mean reversion." He went on to explain that fluctuations in business performance were largely cyclical, and investors could profit from this buying low and selling high. Also Read More
- May Unemployment Report Was an Unexpected Disaster
- Record 94.7 Million Americans Not in Workforce in May
- Fed Will Have to Rethink Plans For June or July Rate Hike
Unemployment Report – Overview
Economists around the world were stunned by last Friday’s unemployment report which showed that a paltry 38,000 new US jobs were created in May, a fraction of the 160,000 new jobs that were expected in the pre-report consensus. It was the fewest number of new jobs in almost six years, reflecting broad hiring cutbacks that raise new concerns about US growth.
Making matters worse, even though the headline unemployment rate fell from 5.0% to 4.7%, that was only because almost 500,000 Americans left the workforce last month, far more than expected. In addition to the May disappointment, the Labor Department revised down the number of new jobs created in March and April by 59,000.
If that weren’t enough, the report also noted that a record number of working-age Americans – almost 95 million – were not in the workforce in May. On almost every front, it was a terrible report. I’ll give you the details below.
Finally, Friday’s pathetic jobs report raises new questions about the Fed’s next move. As I have discussed in recent weeks, Fed officials including Chair Janet Yellen have been suggesting that the next hike in the Fed Funds rate would come this summer, either at the June or July policy meetings. But those plans may now be on hold once again. Let’s get started.
May Unemployment Report Was an Unexpected Disaster
US employers added the fewest number of workers in almost six years in May, reflecting broad hiring cutbacks that will almost certainly raise concerns about US growth and may prompt Federal Reserve policymakers to put off an increase in interest rates.
Last Friday’s unemployment report noted that only 38,000 new jobs were added last month, versus the pre-report consensus of 160,000 and the fewest since September 2010. The 38,000 new jobs in May compares to a revised 123,000 advance in April and 186,000 in March.
So the fact that only 38,000 new jobs were added is a huge negative surprise regarding the health of the US economy. The 38,000 increase in May was far less than even the most pessimistic forecast in the Bloomberg pre-report survey.
The headline jobless rate in May dropped to 4.7% from 5% in April, the lowest since November 2007, but that was because almost 500,000 Americans dropped out of the labor force or stopped looking for work in May alone. This is not good.
With so many Americans leaving the workforce last month, the labor force participation rate fell by 0.2% to 62.6%. The participation rate has declined by 0.4% over the past two months, offsetting gains seen in the 1Q.
“This was an unqualified dud of a jobs report,” said Curt Long, chief economist at the National Association of Federal Credit Unions, noting that “the unemployment rate fell, but for the wrong reason as labor-force participation declined for the second consecutive month.”
May’s disheartening jobs retreat was jaw-dropping in view of the labor market’s remarkably steady performance in recent years. Businesses added just 25,000 jobs in May, led by health care, while federal, state and local governments added only 13,000.
The near-paralysis in hiring was widespread. Manufacturers cut 10,000 jobs and mining and logging, which includes oil producers, chopped 11,000 jobs. Those sectors have been grappling with a weak global economy and low oil prices for nearly two years. But even construction, which generally has been benefiting from a recovering housing market, slashed 15,000 jobs.
And the number of temporary employees placed by staffing agencies declined by 21,000. That is a troubling sign because employers often lay off contingent (part-time) workers before cutting permanent full-time jobs.
Michael Gapen, chief US economist at Barclays, says the disappointing report raises the risk of recession in the next nine to 18 months, noting that past downturns have been preceded by a persistent drop in job gains below the recovery average.
Some analysts suggested that the Labor Department could revise the May jobs number higher along with the June jobs report to be released on July 8. Maybe so, but even if they double the 38,000 reported on Friday that would be only 76,000 which would still be well below the most pessimistic pre-report estimate. We’ll see.
Unemployment Report – Record 94.7 Million Americans Not in Workforce in May
According to the Labor Department, a record 94,708,000 Americans were not in the labor force in May – 664,000 more than in April. As noted above, this caused the labor force participation rate to fall to 62.6%, near its 38-year low and the second consecutive monthly decline.
When President Obama took office in January 2009 during the depths of the Great Recession, 80,529,000 Americans were not participating in the labor force. Since then, 14,179,000 more Americans have left the workforce – some of them retiring and some just quitting because they couldn’t find work.
Just last week at a political fundraiser in Elkhart, Indiana President Obama boasted: “By almost every economic measure, America is better off than when I came here at the beginning of my presidency. We cut unemployment in half, years before a lot of economists thought we would.”
As noted above, the unemployment rate in May dropped to 4.7%, less than half of its Obama-era high of 10% in October 2009. But the labor force participation rate has deteriorated over Obama’s two terms. Over 14 million have left the workforce since Obama took office.
When Obama took office in January 2009, shortly before the recession ended, the labor force participation rate was 65.7%. The following month, it reached an Obama-era high of 65.8%, and then spiraled down for the next seven years, hitting 62.4% in September 2015, its lowest point since 1977.
In May, according to the Labor Department, the nation’s civilian noninstitutional population (all people 16 or older who were not in the military or in a penal, mental or nursing institution) reached 253,174,000. Of those, 158,466,000 participated in the labor force by either holding a job or actively seeking one. That equals 62.6% of the 253,174,000 civilian noninstitutional population.
The Labor Department points to retirements among the aging Baby Boom generation as a key factor affecting the labor force participation rate. But the weak job market has caused other Americans to give up job-hunting in favor of staying home or going back to school.
The DOL counted 5,923,000 people in May as “persons who currently want a job,” up 130,000 from 5,793,000 in April.
Among the major worker groups, the unemployment rates for adult men (4.3%), adult women (4.2%), Whites (4.1%), and Hispanics (5.6%) declined in May. The rates for Blacks (8.2%), Asians (4.1%) and teenagers (16.0%), showed little or no change.
The number of long-term unemployed (those jobless for 27 weeks or more) declined by 178,000 to 1.9 million in May. These individuals accounted for 25.1% of the unemployed.
The number of persons employed part-time because they can’t find full-time work (also referred to as “involuntary part-time workers”) increased by 468,000 to 6.4 million in May, after showing little movement since November.
In conclusion, whenever we hear President Obama boasting that he cut the unemployment rate by more than half, let us not forget that over 14 million Americans have left the workforce since he took office. An all-time record of 94.7 million Americans were not in the workforce in May.
Unemployment Report – Fed Will Have to Rethink Plans For June or July Rate Hike
Fed policymakers have been quite vocal in recent weeks preparing the markets for the second Fed Funds rate rise, most likely at the June 14-15 FOMC meeting next week, or if not at the July 26-27 policy meeting. But last Friday’s news that the economy created a paltry 38,000 net new jobs in May probably constitutes the kind of unwelcome shock that Fed Chair Janet Yellen says would require a change of plan.
A little over two weeks ago futures markets put the chance of an interest rate rise in June at one-in-twenty. But then the Fed released the minutes of its April policy meeting on May 18, which struck an unexpectedly hawkish tone. The odds of a rate hike abruptly tightened to one-in-three.
Last month several members of the Fed’s rate-setting committee said in speeches and interviews that rates should rise soon. In a question-and-answer session on May 27 Ms. Yellen sent the same message, saying that an interest rate rise in the coming months looked “appropriate.”
The April FOMC minutes said the Fed would raise rates in the summer on three conditions: higher growth, rising inflation and further improvement in the labor market. The first two have been met. The economy has looked stronger recently than in the 1Q of the year, when annualized growth was only 0.8%. Most forecasters believe the economy has improved to a 2.0-2.5% pace since the end of March.
The Commerce Department reported last Tuesday that consumer spending in April rose by the most in almost seven years. Personal spending increased 1.0% in April from a month earlier, the biggest one-month jump since August 2009. Overall consumption was up 7.4% from the same month a year ago.
Inflation, too, is on track, having risen from 0.8% in March to 1.1% in April, according to the price index the Fed targets. Core inflation, which excludes volatile food and energy prices, stands at 1.6% over the last 12 months, not all that far from the Fed’s 2% target.
Yet with regards to the Fed’s third concern, the labor market, last week’s stunningly weak jobs report almost certainly means the Fed will have to rethink its plans to raise rates at next week’s policy meeting. Most Fed watchers agree that a rate hike next Wednesday, June 15 is now off the table.
Likewise, as I suggested last week, the Fed may want to wait and see the result of Britain’s referendum on June 23 whether to leave, or stay in, the European Union. Many believe that a decision in favor of “BREXIT” could spark a sharp negative reaction in markets around the world.
It remains to be seen whether the Fed is still determined to raise the Fed Funds rate at the July 26-27 policy meeting – despite the terrible jobs report last week. For that to happen I expect we will need to see a very strong jobs report for June, which will be announced on Friday, July 8, plus a large upward revision of the dire May number of only 38,000 new jobs.
Should that not happen, most Fed watchers expect that Chair Yellen will push the next rate hike out to the September 20-21 FOMC meeting.
LATE NOTE: Fed Chair Janet Yellen spoke yesterday afternoon at an event in Philadelphia. She acknowledged that last Friday’s jobs report was a significant disappointment. However, she warned against reading too much into a single monthly report which is subject to revision.
The Fed Chair made a positive case for the US economy and predicted that GDP for the 2Q will improve considerably from the disappointing 0.8% rate in the 1Q.
Yellen stated once again that the Fed Funds rate needs to rise, but she stopped short of putting a time period on that plan. As a result, I continue to believe, as outlined just above, that a June 15 rate hike is off the table.
A July 27 rate hike will depend on economic reports in the weeks between now and then. I will keep you posted as always.
All the best,
Gary D. Halbert
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