The disappointment following the latest US employment report weighed heavily on the US dollar and on US bond yields as the data brought into question the Fed’s ability to raise rates during its meetings in June or July. However, it is a good idea to try to put the jobs numbers in a broader context – both comparing with job market numbers of previous months as well as to have a look at other indicators that have been released recently.
First of all, it appears that nonfarm payrolls themselves have been decelerating since October of 2015, when they peaked at 295 thousand. January, March and April all saw payrolls numbers between 100 and 200 thousand; lower than the 200 thousand figure that seemed to be the benchmark figure for success or failure during 2015. Nevertheless, economic experts suggest that the actual number for unemployment to hold steady is close to 100 thousand net new jobs. Therefore, even if there is a big deceleration in the pace of job creation, it would have to be consistently below 100 thousand to potentially become a serious source of worry for the Federal Reserve.
Going over the other indicators that have been released during the past month, it looks like the consumer was doing relatively well as retail sales grew solidly during April and the housing market also appeared to be holding well. Personal consumption for April was stronger-than-expected too. University of Michigan consumer sentiment was strong, while the Conference Board consumer confidence was lower. Housing numbers such as starts, existing home sales and new home sales were all stronger-than-expected.
April consumer inflation at 1.1% year-on-year, although far below the Fed’s 2% target, came in at a relatively strong 0.4% monthly pace, exceeding expectations of a 0.3% print.
Industrial production and other factory activity indicators also showed some strength. Industrial output was better-than-expected and durable goods and factory orders appeared strong. Of course the industrial / manufacturing indicators have been quite volatile so these indications might not be as useful. Staying in the manufacturing sector, May’s ISM manufacturing PMI was also stronger than expected.
The revision to first quarter GDP up to 0.8% from 0.5% was positive news for the economy as a whole, while good news for growth also came in the form of smaller-than-expected trade deficits for both April and March (downward revision). Smaller deficits can push up the economy’s growth rate.
On to the jobs market, at the beginning of May (week ending May 2) weekly jobless claims had climbed to 294 thousand. The danger that claims would cross north of 300 thousand was visible back then, but subsequent numbers showed a drop in news claims to below 270 thousand – a more sanguine number.
On the negative side of the employment report, it was not only the small number of jobs created, but also the 0.2% drop in the workforce participation ratio that was worrying. On the same day, there was also disappointing news for Services business confidence as the ISM Non-manufacturing PMI dropped by almost three points from the prior month to 52.9. That marked a deterioration for the massive US services sector, although it remained comfortably in expansion territory.
To sum up, the economic environment in the United States appears broadly favorable despite the recent numbers out of the Bureau of Labor Statistics. This could however develop into something more serious if other indicators also show a sudden deterioration and particularly if there is persistent weakness. As the Fed appears to be more worried about insuring against downside risks, it will probably hold rates until further data confirms that the payrolls report is mainly a blip and that the US economy is staying on track.
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