Five things we learned from May’s shocking jobs report
Anemic job growth of just 38,000 in May -- the worst in more than five years -- shocked analysts, triggered warnings about the state of the economy and most likely derailed a Federal Reserve interest rate hike many had expected was coming this month.
But economists cautioned not to overreact to a single bad jobs report – even the stunningly bad one released by the Labor Department on Friday.
“It’s kind of a yellow flag, I wouldn't call it a red flag,” said Stuart Hoffman, chief economist at PNC Financial Services.
“It’s not time to panic,” he said. “These numbers are quite disappointing but not decisively recessionary or a sign that the economy is down and out.”
Still, the weak numbers bolster Republican arguments that President Obama and his fellow Democrats haven’t been able to fully revive the economy after the Great Recession.
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That’s not good news for Hillary Clinton, the front-runner for the Democratic presidential nomination.
“Terrible jobs report just reported. Only 38,000 jobs added. Bombshell!,” presumptive Republican nominee Donald Trump said on Twitter on Friday.
Jason Furman, chairman of the White House Council of Economic Advisors, conceded Friday that the pace of job growth in May was “considerably slower” than in recent months.
But he and some top Democrats stressed that U.S. businesses now have added jobs for a record 75 straight months.
Here are five things we learned from the May jobs report.
Job growth ground nearly to a halt last month
The 38,000 net new jobs created in May were about 120,000 less than economists had forecast. It was a drastic drop-off from the initially reported 160,000 jobs added in April and the weakest performance since September 2010.
But the news gets worse.
The Labor Department on Friday also revised down April’s total to 123,000. Combined with a downgrade for March, that meant there were 59,000 fewer jobs added in those two months than earlier thought.
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All told, the economy averaged 116,000 net new jobs added from March through May. That’s nearly half the 222,000 average for the 12 months that ended Feb. 29.
Some key economic sectors slashed payrolls last month.
The telecommunications industry shed 37,200 jobs, temporary help services 21,000, construction 15,000, mining 11,000 and manufacturing 10,000.
“Employers have been more guarded in adding additional workers because as we see in the other major economic indicators, the overall pace of growth has slowed,” said Patrick O'Keefe, economic research director at accounting and consulting firm CohnReznick
“Employers don’t want to get ahead of their order books,” he said.
The headline number is not quite as bad as it appears
Now for a bit of good news.
May’s extremely poor performance was partly caused by a temporary factor.
About 35,000 Verizon workers in 11 states went on strike in April, and the Labor Department did not count them on employers payrolls last month. That’s the the main reason why telecommunications payrolls dropped.
The strike was settled last week.
Furman cited the Verizon strike as a reason for the “disappointingly low” jobs number. And such singular events are why economists said not to put too much stock in one month’s report.
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“It’s not uncommon to see employment gains fluctuate wildly from month to month, and there have been other instances in recent years where hiring has temporarily faltered,” said Ryan Wang, U.S. economist at HSBC, the large London-based bank.
Other temporary factors could be at play as well, he said.
Mild winter weather in much of the country could have led to earlier-than-usual hiring by construction companies, which pushed down May hiring. In February and March, the industry added 50,000 net new jobs, compared with just 20,000 for the same months the year before.
Conversely, construction companies shed a total of 20,000 total jobs in April and May of this year. They added 55,000 in those months last year.
Other labor-market indicators, including first-time claims for unemployment insurance and announced layoffs, haven’t indicated a steep May falloff, said Mark Zandi, chief economist at Moody’s Analytics.
“The bottom line is that while job growth has throttled back from its strong pace at the start of the year, it is much stronger than (Friday’s) data suggest,” he said.
Weak job growth wasn’t the only worrisome data
Even if May’s surprisingly poor job growth was a fluke, as Zandi suggested, there was another worrisome sign: a large number of people dropped out of the labor force for the second straight month.
About 458,000 people gave up looking for work in May, pushing the percentage of working-age Americans in the labor force to near a four-decade low of 62.6%.
That was the main reason why the unemployment rate in May fell to 4.7%, the lowest since 2007.
“The drop in the unemployment rate isn’t as good a news as it appears,” Hoffman said.
About 362,000 people dropped out of the labor force in April. That was the first shrinkage since September.
Wage growth was a bright spot
Still, all wasn’t bad in Friday’s data.
Wages posted another month of solid improvement. Average hourly earnings increased 5 cents in May to $25.59, although that was less than the 9-cent increase the previous month.
For the 12 months ending May 31, average hourly earnings increased 2.5%. That’s well above the rate of inflation.
“It was the diamond in the rough,” O’Keefe said.
“In a noninflationary environment, that’s increased spending power that households have,” he said. “Given all the other weaknesses in this report, that was encouraging.”
Fed policymakers are likely to pause on a rate hike
Fed policymakers have indicated in recent days that they could nudge up their benchmark short-term interest rate this month.
But Fed Chairwoman Janet L. Yellen and other officials have conditioned that on the economy continuing to improve as they expected. It’s likely none of them expected May’s startlingly poor job creation.
“Not only was May itself weak, but the large downward revisions in March and April … have taken the Fed’s June rate hike off the table,” said Nariman Behravesh, chief economist at IHS Global Insight.
Fed Gov. Lael Brainard said Friday that the data in the latest jobs report “suggest that the labor market has slowed.”
In a speech to the Council of Foreign Relations in Washington, she said “prudent risk management implies there is a benefit to waiting for additional data” before enacting another rate hike.
She and other central bank policymakers increased the federal funds rate by 0.25 percentage points in December. It has been near zero for seven years in an attempt to boost the recovery.
Fed policymakers are scheduled to meet June 14-15 to decide if the economy is strong enough for another small hike. They’re likely to wait at least a month to see if May’s jobs report was an anomaly, analysts said.
Staff writer Don Lee contributed to this report.
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