The Employment Situation in May – All Systems: NO


April was a bad month, May is a shocker, and June is a non-starter.

The Bureau of Labor Statistics (BLS) reported payroll employment growth stalled in May, expanding by only 38 thousand. The gains in May were expected to be depressed because of roughly 40 thousand Verizon workers on strike, but even taking that into account May’s gains were well below analysts’ expectations. Payroll gains in March and April were revised downward by a combined 59 thousand.

The unemployment rate declined to 4.7% in May from 5.0% in April, not because workers found work (the household survey shows only 26 thousand did), but because the labor force shed 458 thousand persons. The labor force participation rate declined by 0.2 percentage point, matching the decline in April, bringing it down to 62.6% and erasing the gains of the first four months of the year.

Policymakers at the Federal Reserve were set to take the next step in monetary policy normalization (i.e., raise the federal funds rate) at the upcoming June 14-15 Federal Open Market Committee (FOMC) meeting conditional on: signs of a second quarter rebound in GDP growth, evidence that core inflation is moving toward 2%, and continuing gains in the labor market. They got GDP, inflation is in the eye of the beholder, but the labor market reports for April and May (since the April FOMC meeting) cannot be seen as continuing improvement. A June rate hike is off the table.

The labor market report for June (release date July 8) should include the return of the 40 thousand Verizon workers but is unlikely to be strong enough to erase caution and motivate an interest rate hike at the July FOMC meeting. Strong labor reports for June, July and August may restore enough confidence for a September increase, but the number of rate increases in all of 2016 is dwindling fast.

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