US Watch
Group Economics Macro & Financial Markets Research
03 June 2016
May’s job report tells Fed to wait
April’s nonfarm payrolls fell sharply, increasing by only 38K; the unemployment rate dropped to 4.7%, but this was due to a decline in the labour force
Maritza Cabezas
Senior Economist Tel: +31 20 343 5618 maritza.cabezas@nl.abnamro.com
Wage growth rose by 0.2% after increasing 0.4% in April; we don’t see much room for a rebound in wage growth given weak profit growth
The Fed will need to see the labour market improving before it resumes its rate hikes; a June hike is off the table; There is still a possibility of one rate hike this year, but it looks more distant now. Our base case is for no change
US nonfarm payrolls added only 38K jobs in May… May’s nonfarm payrolls increased only 38K from a downwardly revised 123K in April. The revisions of the past two months amounted to -59K. This report suggests that firms slowed their hiring considerably. Part of this slowdown is explained by a strike in Verizon Communications, amounting to around 30-40K, but other sectors including trade and temporary help also saw sharp falls in hiring. This jobs report was an important one given that Fed officials had been adopting a hawkish tone suggesting that they were considering a rate hike in the near term.
Drastic fall in nonfarm payrolls 000’s
% 12
400 200 0 -200
10 8 6
-400 -600 -800 -1000
4 2 0 06
07
09
11
Non farm payrolls (lhs)
12
14
16
Unemployment (rhs)
Source: Thomson Reuters Datastream
Meanwhile, the message from the household survey was not that positive either. The participation rate fell to 62.6% in May from 62.8% the previous month. The rate has declined by 0.4 ppts over the past two months, offsetting gains of in the first quarter. As for
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US Watch - May’s job report tells Fed to waitt- 03 June 20 016
the unemployment ra ate, it declined by 0.3 ppts to 4.7%. This shharp fall is expla ained by the decline e in the civilian n labour force. We W think that th his fall could bee an outlier and that it does not n necessarilyy point to labour market tightening. … whiile wage grow wth picks up modestly m Averag ge hourly earniings increased by 0.2% in Ap pril from an upw wardly revised 0.4% the previous month. The e annual increase of average hourly earningss was 2.5%, similar to April’s. This is still be elow the 3-3.5% % trend wage growth g that the Fed would like e to see. Wage growth remain ns a concern fo or Fed officials and we don’t thhink that there is much room for f strong wage e growth in the coming time given g the weakk profit growth in the past two qu uarters. s-sector contiinues to show w weak hiring Goods Turning to the detailss of the report, hiring in the goods-producin g ng sector show wed a further rise in n lay-offs (-36K K), while the manufacturing sector cuttingg 10K after hiring 2K the previous month. Man nufacturing has s been the wea ak spot in the jjobs report for a while. The construction sector w which had been adding job bs in the past months, cut 15K in May. Meanw while the neg ative surprise was service--producing acttivities which showed job growth h tempered con nsiderably (61K K), with the larg gest drop in infformation, likely y on account of the Verizon strike, while educatio on and health made m the stronngest contribution. Proba ability of rate h hike this year declines as a result of weaak jobs report This weak w jobs reporrt is not good news n for the Fe ed. Lately hawkkish comments from Fed policym makers suggessted that the po ossibility of a ra ate hike in the ccoming months s had increas sed. However, they would ha ave needed a strong s job reporrt to erase any y doubts surrounding the stren ngth of the US economy. Inde eed the most reecent minutes reported that most participantss judged that iff incoming data a were consisteent with economic growth picking g up, labour ma arket conditions continuing to o strengthen annd the inflation outlook making g progress tow ward the Comm mittees 2% obje ective, then it w would be appropriate to increas se the target ra ate in June. The fla agship of the F ed, a strong jo obs market, is now n in questionn and they will need a few strong jobs reports to o confirm the strength of the labour market nnow. Rate hike e eral funds future es was sharplyy cut for June and a downexpecttations measurred by the fede scaled d for the rest off the year. The US dollar weakened consideerably. Although chances of a rate hike in coming g months remain significant, we w continue to expect the Fed d to remain d this year. Th is as a result of o concerns abo out the weakerr pace of growth of the US on hold economy and the unccertainty aroun nd the global ec conomy.
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US Watch - May’s job report tells Fed to waitt- 03 June 20 016
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