May U.S. Employment, Mfg PMI, April Income, Construction Spending

Jobs Downshift Confirmed, Limping Through the Second Quarter

  • The May Payroll Employment Survey increased by a weak 69,000 jobs for the month.
  • The Unemployment Rate ticked up to 8.2 percent as the labor force increased substantially by 642,000.
  • Personal Income for April increased by 0.2 percent, consumer spending gained 0.3 percent.
  • The ISM Manufacturing Index for May ticked down to a still-positive 53.5 percent.
  • Construction Spending for April increased by 0.3 percent with gains in private multifamily projects.

The May employment data confirms a downshift in hiring that began in March.  Increasing anxiety over an uncertain global macroeconomic environment is taking a toll on fledgling animal spirits in a still-unfolding economic drama. Higher gasoline prices earlier in the year, a worsening crisis in the Eurozone, weaker growth in Asia and concern about the approaching “Fiscal Cliff” in the U.S. may all be weighing on business confidence despite the ongoing improvement to household balance sheets, gains in auto sales and signs of strengthening in housing markets. A net of just 69,000 payroll jobs were added to the U.S. economy in May, well short of what is needed for a self-sustaining expansion. Also, the weak May jobs numbers add significant weight to the theory that the slowdown in job creation that began in March is not just an echo of the strong job growth we had from December through February, but rather it represents a meaningful downshift in U.S. economic growth heading into the current second quarter. In the May jobs report both March and April job gains, already weak, were revised down further by a total of 49,000 jobs. The U.S. unemployment rate ticked up to 8.2 percent in May, the first monthly increase since June 2011. The household employment survey showed a sizeable gain of 422,000 jobs for the month, but it also showed a large increase of 642,000 to the labor force, thus pushing the unemployment rate up.

Personal income increased by a weak-to-moderate 0.2 percent in April. With zero inflation registered by the PCE price index, real disposable personal income increased by 0.3 percent for the month. Nominal consumer spending gained 0.3 percent. Again, after zero inflation, real consumer spending also gained 0.3 percent, and that was good news for Q2 GDP.  However, with consumers spending ahead of income, the personal saving rate dropped a tenth to 3.4 percent. In a weak job market there is a limit to how far consumers will lean over their skis before they have to pull back, setting up a weak third quarter unless job creation reaccelerates. One factor that may allow consumers to keep leaning is the relatively strong condition of household balance sheets. Consumer deleveraging has left households with ample room to take on auto loans and increase some credit card debt. Whether they will have the confidence to do so in an otherwise sluggish economy this summer remains to be seen. The ISM Manufacturing Index for May fell to 53.5, a still-positive reading that indicates healthy expansion in the manufacturing sector. Anecdotal comments in the report were generally positive. The relative strength seen in the national ISM survey counters some weakness seen in regional manufacturing reports. Construction spending for April increased by 0.3 percent. Weakness in total public construction, expected as fiscal stimulus spending unwinds, was countered by gains in private residential, particularly multifamily construction.

Given today’s weak job report, worsening strains in Europe and slower growth in Asia, the odds of the Federal Reserve announcing new monetary policy actions at the upcoming June 19/20 FOMC meeting are above 50 percent.  Perversely, worsening tensions in Europe may be doing some of the Fed’s job for them by reinforcing the flight to quality, driving down U.S. Treasury bonds yields to historic lows. However, given the low likelihood of additional fiscal policy measures this year, the onus is on the Fed to try to break the string of negative economic news and cushion the well-performing parts of the U.S. economy from further drag.

Market Reaction: U.S. equity prices are down. Treasury bond yields are reaching new lows. WTI crude is down to $83.78/barrel. The dollar is down versus the yen and the euro.

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