by Bill O’Grady and Kaisa Stucke
[Posted: 9:30 AM EDT] The employment data came in with a very negative surprise (see charts below for details). Here are some of the highlights. Non-farm payrolls rose by a mere 38k compared to estimates calling for a 160k rise. The previous month’s numbers were also revised down by 59k; thus, taking the revisions into account, the payroll numbers were negative in May. The telecommunication workers’ strike may have cut payrolls by around 35k, but the weak employment data cannot be blamed solely on the strike. Services jobs rose 61k, while goods-producing jobs dropped 36k, with the total private jobs rising a mere 25k.
In the household survey, a 458k drop in the labor force, coupled with a 26k rise in employment, led to a drop in the unemployment rate of 0.3% to 4.7%. Obviously, this isn’t the way one wants to see the unemployment rate decline. The participation rate fell to 62.6% from 62.8%. Those Americans not in the labor force rose by 664k, to 94.708 mm. Over the past two months, the “not in the labor force” number is up 1.226 mm. And, with all this, wage growth held steady at 2.5%, on forecast, and hours worked was unchanged at 34.4 hours, a bit below the 34.5 hours forecast.
Market action is fairly predictable. The dollar is plunging, the EUR and JPY are appreciating, gold is up over $20 per ounce, equities are weakening and interest rates are falling. The yield curve is steepening. This data almost certainly takes June off the table for a rate hike and, barring some sort of major revision in the June report, July is probably not likely either. Fed funds futures for a June hike were around 35% before the data; it has fallen to 6%. For July, the same data is similar, from 45% to 30%. In fact, you don’t get to a 50% odds of a hike now until November.
There is always an element of caution with the employment report. Revisions do occur and other indicators of labor markets, like the ADP report and initial claims, gave no warning that a number this bad was in the offing. Thus, it’s important not to over-react to the clearly negative tone of this report. However, if the data doesn’t improve quickly, this is a very worrisome factor which will raise concerns about a downturn in the economy.