- The May employment report was overall disappointing with weakness in job growth across a broad range of sectors. While some of the current weakness can be explained by a payback from the warm winter months, the underlying state of the labour market seems to be weakening as well.
- The implications of today’s report are twofold. First, it is clear that private consumption growth cannot keep up momentum if the labour market does not recover.
- Second, we expect the Fed to err on the side of caution and implement QE3 at the 20 June FOMC meeting to facilitate stronger growth. We expect Ben Bernanke to indicate this at his testimony before Congress on Thursday 7 June.
Details
Over the past three months, job growth has slowed from an average of 252,000 per month in December to February to 96,000 from February to May. Some of the slowdown can be explained by warm winter weather as the unusually warm weather has likely pushed forward some of the seasonal boost to hiring, which usually occurs in the spring months. This is now showing up as weakness in the weather-dependent sectors such as construction and leisure and hospitality. However, this is unlikely to explain all of the loss in job growth.
Turning to the details, weakness in the establishment survey was evident also outside of the most weather-dependent sectors. Private payrolls rose a modest 82,000, the government shed 13,000 and net revisions to April and March amounted to -49,000. Construction employment was a big negative shedding 28,000 persons, which points to some payback from warm winter months. The same goes for leisure and hospitality, which shed 9,000 persons after adding on average 37,000 per month in the three months
from December to February. Weakness was also seen in other places though, with manufacturing adding only 12,000, retail trade 2,000 and temporary help services grew a modest 9,000. The best performing sector was transportation adding 54,000 jobs and education and health with 46,000.
The average private workweek held steady at 33.7 but aggregate hours dropped 0.2%. With hourly earnings rising only 0.1%, our proxy for nominal income growth plunged to 2.7% annualised, which is clearly not enough to hold up private consumption growth at the current levels.
One positive was that the household survey showed an increase of 422,000 in employment but with 642,000 joining the labour force, unemployment rose one notch.
Assessment and outlook
With at least some of the current weakness related to weather distortions, we expect job growth to rebound in coming months. That said, economic data has been mixed lately, with the most recent prints on initial jobless claims, consumer confidence and pending home sales signalling a slowdown in growth.
We expect the Fed to react to the weakness in the labour market and believe the chance of another round of quantitative easing at the 20 June meeting has risen to 80% following today’s employment report.
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