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
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
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.