U.S. Jobs Weakness May Be Temporary, But Loss of Momentum Isn’t

  • Payroll gains running below last year’s pace after May figures
  • Some data consistent with signs of tight labor market

What the Jobs Report Says About the Health of the Economy

There are plenty of explanations for the weaker-than-expected May jobs report, but the big picture is clear: The U.S. labor market has lost some of its mojo.

Monthly payroll gains are averaging 162,000 this year, a step down from the 2016 pace of 187,000, following a below-forecast rise last month and downward revisions to March and April in Labor Department figures released Friday. While the unemployment rate fell to a 16-year low of 4.3 percent, the employment-to-population ratio also declined. Wages failed to accelerate as expected, with annual growth remaining below highs for the previous expansion.

The data come with a variety of caveats, including seasonal-adjustment issues unique to May, and economists still expect the Federal Reserve to forge ahead with an interest-rate hike later this month. Yet the numbers are an indication of both broader trends that analysts are anticipating -- such as businesses having difficulty finding skilled and experienced workers as the U.S. nears full employment -- and ongoing puzzles such as the lack of larger paychecks for workers.

“Clearly we’re seeing some slowdown in job growth,” said Stuart Hoffman, senior economic adviser at PNC Financial Services Group Inc. in Pittsburgh. “I’d call the job numbers soft, not weak. Some of that may be a lack of employees but some of it is also slower demand.” In addition, “what’s still missing is any sign of faster, bigger pay hikes.”

The broader hiring slowdown is in line with forecasts from many analysts, who have penciled in a downshift as the economy rounds out eight years of expansion this month and slack in the labor market gets further absorbed. Hoffman projects a monthly pace of 150,000 to 160,000 this year, still well above what’s needed to keep up with the growth in the labor force.

There were some encouraging spots in the data. The number of people working part-time who want a full-time job fell to a nine-year low, while the tally of discouraged workers plunged to the fewest since 2007. The broadest measure of joblessness, the underemployment rate, dropped to 8.4 percent, bringing its decline since January to a full percentage point, a move highlighted by Gary Cohn, President Donald Trump’s chief economic adviser.

U.S. National Economic Council Director Gary Cohn discusses the U.S. May jobs report and the Paris climate agreement.

(Source: Bloomberg)

Even with disappointing figures, the jobs report is still “about consistent with a pickup in consumer spending” that will anchor the economy’s projected rebound this quarter, according to Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.

“This doesn’t change the overall story of an economy that generally seems to be growing above trend and reducing slack,” Feroli said. “This keeps the Fed on track.”

Some of the weakness may have been due to difficulties adjusting the data for the end of the school year, economists said. Payrolls growth had slumped in May 2016, only to surge in the following months. Given this, the reading for last month could be a “short-lived seasonal hiccup,” Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York, said in a note.

“Whatever was going on in May appeared to have little or nothing to do with a lack of job opportunities,” he wrote. “Every survey and anecdote as well as most of the data confirm without a shadow of a doubt that demand for workers is robust but supply is dwindling.”

Labor Shortage

Other analysts echoed that explanation. If there’s a developing shortage of labor that makes it harder for employers to fill vacancies, that would mean slower payroll gains, along with a declining unemployment rate and faster wage growth, according to Ward McCarthy, chief financial economist at Jefferies LLC in New York. 

As such, the latest data “should not be interpreted as an indication that the labor market has turned sour,” McCarthy wrote in a note.

While hard to prove, the disappointment may also be a sign businesses are reluctant to expand headcounts until they see more evidence the new administration’s plans are translating into legislation that’ll reduce taxes and spur growth.

Cohn said Friday on Bloomberg Television that “we still think there’s an awful lot that we in the administration can do” on taxes, regulation and infrastructure to bring people back to the workforce and boost wages.

Even so, some of the trends precede November’s election. Excluding weather-sensitive industries, job growth has been on a slight downward trend since the U.S. summer, according to Jed Kolko, chief economist at Indeed, a job-listings website. Also, prime-age labor-force participation has stuck within the same range since last fall, he said.

“The labor market is plateauing,” he said. “The monthly job growth numbers that we’d been seeing for years are not sustainable in the long run and that’s because the prime-age workforce is growing more slowly.”

— With assistance by Michelle Jamrisko

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