Weak Jobs Report Clarifies Fed’s Likely June Path: What We Learned During the Week of May 30 – June 3

May was the worst month for job creation since the summer of 2010. Meanwhile, consumers were spending their increased disposable income. Here are the 5 things we learned from U.S. economic data released during the week ending June 3.

#1Hiring activity slowed to a crawl in May. While the month’s employment report from the Bureau of Labor Statistics had been expected to be soft due to the now-settled strike at Verizon, the report’s broad weakness was surprising. Not only did nonfarm employers add only 38,000 jobs during the month (the smallest single-month increase since the fall of 2010), the BLS lowered its payroll estimates for March and April by a total of 59,000 jobs. The private sector added a mere 25,000 jobs, split by a 61,000 gain for the service sector and a 36,000 job contraction for the goods producing side of the private sector economy. The largest payroll gains occurred with health care/social assistance (+55,400), retail (+11,400), leisure/hospitality (+11,000) and financial activities (+8,000). Employment contracted in information (-34,000, again largely due to the now settled Verizon strike), temporary help services (-21,000), construction (-15,000), mining/logging (-11,000), wholesale trade (-10,300) and manufacturing (-10,000). 060316graphicHolding steady was the average workweek (at 34.4 hours) while the average for weekly earnings of $880.30 was up a modest 2.2% from a year earlier.

The separate survey of household found the unemployment rate dropped to another post-recession low of 4.7% (vs. 5.0% in April and 5.5% in May 2015). But the same survey also found household employment growing by a tepid 26,000 people and that 458,000 people exited the labor force during the month. The latter resulted in the labor force participation rate slipping by 2/10ths of a percentage point to 62.6%, which puts it back to a 39-year low that it has touched recent months. The household survey also found the count of part-time workers seeking a full-time job rising by nearly ½ million to 6.430 million people, the median length of unemployment falling to another post-recession low of 10.7 weeks (vs. 11.6 weeks in May 2015), and the BLS’ broadest measure of labor underutilization holding steady at 9.7% (vs. 10.7% in May 2015).

So, what is one to take away from this report? It should be noted that this data series can be subject to significant revision, so it is possible that the May numbers will improve in the coming months. Further, the drop in information employment will rebound in June as striking Verizon workers have returned to work. But still, it does appear that May was a soft month for the labor market, but one should always caution to not overact as one month’s data does not by itself reflect a trend.  But if there is one thing for certain, a rate hike is surely off the table for the Federal Open Market Committee meeting later this month.

#2Consumer spending jumped in April. The Bureau of Economic Analysis reports that “real” personal consumption expenditures (PCE) increased 0.6% during the month, the largest single-month gain in nearly a year and an improvement from the 2 months of the previous 3 that saw no growth. Consumer expenditures were up 3.0% over the past year, its best 12-month comparable since last September. Real spending on goods increased 1.2%, including a robust 2.2% surge in spending for durable goods reflecting a large gain for automobiles (+5.4%). Consumer spending on nondurables grew 0.7%, including an increase of 1.3% for apparel. Spending on services improved by 0.4% during the month. The increased consumer spending was funded by a 0.4% gain in nominal personal income and a 0.5% advance in disposable income, the latter dropping to a 0.2% increase after adjusting for inflation. Real disposable income has increased 3.3% over the past year. The saving rate dropped by a ½ percentage point to +5.4%, its lowest point of the year.

#3The trade deficit expanded in April as both exports and imports increased. The Census Bureau and the Bureau of Economic Analysis estimate exports grew by $2.6 billion during the month to a seasonally adjusted $182.8 billion (-4.6% vs. April 2015) while imports increased $4.5 billion to $220.2 billion (-5.3% vs. April 2015). The resulting seasonally adjusted deficit of -$37.4 billion was $1.9 billion wider than that of March but was 8.6% smaller than that of April 2015. The goods deficit widened by $1.4 billion to $58.8 billion. Goods imports grew by $4.3 billion, led by increased imports for capital goods (+$2.5 billion) and industrial supplies/materials (+$1.1 billion). Exports of goods grew by $2.8 billion, with increased exports for industrial supplies/materials (+$1.8 billion) and automobiles/parts (+$0.8 billon). The goods surplus narrowed by $0.5 billion to +$21.4 billion. Based on 2009 dollars, the “real” goods deficit of -$57.6 billion was $1.5 billion higher than March’s real goods deficit and was 1.6% smaller than that of a year earlier. The U.S. had its largest goods deficits during April with China (-$26.6 billion), the European Union (-$11.8 billion) and Japan (-$6.0 billion).

#4Purchasing managers report slightly faster growth in manufacturing but slower expansion for the service sector during May. The Purchasing Managers’ Index (PMI) from the Institute for Supply Management added a half point during the month to a seasonally adjusted reading of 51.3. This was the 3rd straight month in which the PMI was above a reading of 50.0, indicative of a manufacturing sector that is expanding. One of the index’s 5 components improved during the month: supplier deliveries added 5.0 points to 54.1. Declining during the month were indices for production (off 1.6 points to 52.6), inventories (off ½ point to 45.0) and new orders (off 1/10th of a point to 55.7). The employment index was unchanged at 49.2, its 6th straight month with a reading below 50.0. 12 of 18 tracked manufacturing industries expanded during the month, led by wood products, textile mills and printing.

Meanwhile, the ISM’s measure of nonmanufacturing business activity slumped 2.8 points to a seasonally adjusted 52.9, its lowest reading since February 2014. Falling were index components for new orders (down 5.7 points to 54.2), business activity (down 3.7 points to 55.1) and employment (down 3.3 points to 49.7) while the index for supplier deliveries added 1.5 points to 52.5. 14 of 18 tracked service sector industries enjoyed increased business activity during the month; including, health care/social assistance, accommodation/food services and utilities. The press release noted the survey results and comments received reflected “a cooling-off and slowing in momentum from the previous months of growth for the non-manufacturing sector.”

#5Construction activity took a breather in April. The Census Bureau estimates the seasonally adjusted annualized rate of construction put in place during the month was at $1.134 trillion, a 1.8% decline from March but still up 4.5% from year ago levels. Both private (-1.5%) and public (-2.8%) sector construction spending slowed during the month to $843.1 billion and $290.8 billion, respectively. In terms of the former, both residential and nonresidential construction spending declined at a 1.5% pace, with residential spending pulled down by a 3.1% drop in new construction of multi-family homes (single-family home construction was flat for the month). Residential construction spending was 8.0% above year ago levels, with new spending on single-family and multi-family construction 12.9% and 21.4%, respectively, above year ago levels.

Other data released over the past week that you might find of interest:
Jobless Claims (week ending May 28, 2016, First-Time Claims, seasonally adjusted): 267,000 (-1,000 vs. previous week; -10,000 vs. the same week a year earlier). 4-week moving average: 276,750 (unchanged vs. the same week a year earlier).
Factory Orders (April 2016, New Orders, seasonally adjusted): $460.5 billion (+1.9% vs. March 2016, -1.8% vs. April 2015).
The Conference Board Consumer Confidence (May 2016, Index (1985 =100), seasonally adjusted): 92.6 (-2.1 points vs. April 2016).
Vehicle Sales (Mary 2016, seasonally adjusted annualized rate): 17.45 million (-0.2% vs. April 2016, -1.4% vs. May 2015).
Case-Shiller Home Price Index (March 2016, 20-City Index, seasonally adjusted): +0.9% vs. February 2016, +5.4%. vs. March 2015.
Agricultural Prices (April 2016, Prices Received by Farmers, seasonally adjusted): +0.2% vs. March 2016, -10.1% vs. April 2015.
Beige Book

The opinions expressed here are not necessarily those of Kevin’s current and previous employers. No endorsements are implied.

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