Saturday, June 8, 2013

Another solid jobs report in America

US payrolls expanded 175k in May, broadly in line with market expectations and better than my expectation (fear?) that by the middle of the second quarter of the year we would be seeing a sharper slowdown in jobs, especially in the Government sector on the back of the sequester.  The unemployment rate nudged up to 7.6% from 7.5% in April reflecting a blip higher in the participation rate.

On a sectoral basis jobs growth was strong in the retail sector which added another 28k jobs in May while business services added 57k.  Manufacturing jobs fell for the third month in a row, consistent with the recent decline in the employment sub-index in the manufacturing PMI.  Current weakness in manufacturing reflects weak inventory building and soft external (export) demand.  The stronger growth we expect to see later this year, driven predominantly by the housing market, will be positive for the manufacturing sector.

The surprise for me was the only modest 3k drop in government employment over the month.  The decline in Federal government jobs was offset by gains at the State and local level.  As I’ve mentioned before, state and local government went through their own fiscal consolidation earlier than Federal Government, and is now largely through the process.  In that respect, now is a good time for Federal Government to be going through its adjustment phase.

Average monthly jobs growth this year stands at 190k.  Part of that reflects the particularly strong January and February months which in turn reflected the end-2012 fiscal uncertainty that pushed some activity, including hiring, into the early part of this year, which was captured in the February payrolls gain of 332k.  Over the past three months the average monthly gain has dipped to 155k, consistent with the recent softening in activity data including manufacturing and consumer spending.

The rise in the unemployment rate on the back of modest increase in the participation rate, which rose off its 34-year low of 63.3 in April to 63.4, is consistent with our (and importantly the FOMC’s) view that part of the recent decline in the participation rate is cyclical.  If that continues it is quite conceivable that we could see the trend decline in the unemployment rate stall, or possibly reverse, at the same time as we see continued modest jobs growth.

In terms of implication for the increasingly schizophrenic (good description, thank-you Shane) QE tapering discussion, I think the labour market is still falling short of the substantial improvement the Fed wants to see before looking to reduce its asset purchase program.  There has been too much focus on the unemployment rate getting closer to the Feds target of 6.5% and not enough on the rate of jobs growth.  The Fed has indicated that +200k per month jobs growth is consistent with the substantial improvement they are looking for in the labour market.  The current 3-month average of 155k falls well short of that.  If the unemployment rate were to continue to the 6.5% level without the required level of jobs growth I have no doubt the Fed will “re-set” the unemployment target.

That means right here right now we see no imminent tapering of the Fed’s asset purchase program.  The earliest we would expect to see that would be the end of the year which requires a number of preconditions: a pick-up in growth from the 1.5% (saar) we expect in the June quarter, a commensurate improvement in jobs growth, further declines in the unemployment rate on the back of jobs growth rather than further declines in the participation rate, and greater confidence that (core PCE) inflation is heading back towards 2%.  When you think about it like that it’s actually quite a high hurdle.