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'Terrible, but...' — Wall Street attempts to make sense of the ugly jobs report

Sam Ro
Managing Editor
(Image: Wikimedia Commons)

The US economy added far fewer jobs in May than expected.

According to the Bureau of Labor Statistics, US companies added just 38,000 nonfarm payrolls during the month. Economists were expecting 160,000. Meanwhile, the unemployment rate fell to 4.7% in May from 5.0% in April, but this was largely a function of 458,000 workers dropping out of the labor force.

The payrolls number is down sharply from the 123,000 added in April and the 186,000 added in March. Much of the decline was attributed to the Verizon labor strike, which economists accounted for in their forecasts.

The unemployment rate fell even as payrolls missed expectations.

The report was bad enough that some economists are now talking about that dreaded r-word: recession.

"History suggests that payroll growth slowing persistently below its expansion-average points to higher risk of a recession," Barclays' Michael Gapen said. "Since 1960, when payroll growth has dipped persistently below its recovery-period average, the US economy has more often than not found itself in an NBER­-defined recession 9 to 18 months in the future. Hence, that payroll growth has fallen below the current expansion average in three of the past four months signals to us that risks of a near­ to medium­-term recession have risen."

But...

"Terrible, but temporary," Pantheon Macro's Ian Sheperdson said. "The payroll number is startlingly weak, even after adding back the 35K striking Verizon workers. The numbers are soft across the board, with the exception of education, health and government."

But like many economists reacting to the report, Sheperdson believes this isn't the beginning of a longer term problem.

"The good news is that it should not last," he continued. "The pace of layoffs hasn't changed, but NFIB hiring intentions have rebounded back to the middle of the range of the past year and ISM non-manufacturing hiring is on its way back too. We expect a significantly better June number (even after the 35K bounce from the end of the Verizon strike) and a return to 200K-plus in July."

"The weakening appears to be exaggerated at least," High Frequency Economics' Jim O'Sullivan said. "While the drop in the unemployment rate in the latest month looks at odds with the other data, the level was probably due for some catch-up after stabilizing for six months."

"In any event, the report clearly makes Fed tightening as soon as the June meeting highly unlikely," O'Sullivan added. "Two more employment reports will be released between now and the July meeting."

June is off the table

As far as monetary policy implications are concerned, this disappointing jobs report increases the likelihood that the Federal Reserve will put off its next interest rate hike.

“[T]he message for policymakers is far from unambiguous as timid job creation is offset by indicators of less labor market slack,” Allianz’s Mohamed El-Erian wrote. “This puts the Federal Reserve in a tricky situation – reducing the probability for a rate hike in June but keeping July very much on the table.”

Some economists were more certain that a June rate hike was off the table.

"In light of the weaker-than-expected employment report, we have revised our subjective odds of the timing of the next FOMC rate increase," Goldman Sachs economists said. "We now see probabilities of 0% for June, 40% for July, and 30% for September."

Here's a round up of what some Wall Street economists are telling their clients:

BNP Paribas: "Ouch! ... We expect the Fed to view this report as negative. This supports our view for the FOMC to keep rates on hold throughout 2016 and 2017."

JPMorgan: "Ouch! ... The slowing in private hiring was disturbingly broad-based, as the diffusion index indicated that only 51.3% of the 278 in- dustry groups increased employment last month, the lowest since shortly after the recession."

Renaissance Macro: "The most concerning aspect of this report was the breadth; the payroll diffusion index fell to 51.3, the lowest since early 2010."

RBC: "To be sure, we think this report represents an aberration and not the beginning of a new trend low for jobs growth. Job growth is naturally slowing as we enter the mature stages of the cycle, but not to the extent this latest report suggests."

Bank of America Merrill Lynch: "There was no saving grace in this disappointing report, and the recent sluggishness in the labor market warrants increased Fed cautiousness. We think a June hike is off the table (and the markets agree, pricing in less than a 5% chance of hike after the number this morning). While a hike in July is still a possibility, we are increasingly comfortable with our September call."

Bank of Tokyo-Mitsubishi: "...But payroll jobs underwhelmed at an increase of just 38K with downward revisions to March/April of 59K, so net, net, the economy lost 21K jobs. What did Yellen say last week, the economy had gained 14 million jobs since the Great Recession? Make that 14 million minus 21K."

Societe Generale: "The three-month average in payrolls is now just 116,000, the weakest since July 2012. Moreover, that 116,000 average is at the bottom end of the range that most Fed officials think will keep the unemployment rate steady (100,000-125,000 range), so this will not exactly be welcome news to Fed officials."

Credit Suisse: "Today’s report is consistent with a modest downside surprise in a labor market near full-employment. If the economy is in such a state, average jobs growth should be closer to 100K per month than 200K, wage growth should be higher than it was in recent years, and overall labor income should grow at a similar rate to when jobs were growing faster. With a quirky strike and ordinary volatility, today’s data fit that description."

Wells Fargo: “By most measures the labor market has made significant strides in the seven years since the recession ended. However, many continue to show the labor market remains far from fully healed, and today’s report casts doubt on whether growth will remain strong enough to return the labor market back to its pre-recession state. Under-employment remains pervasive, with the share of employed workers part-time for economic reasons stalling in recent months at around four percent. In addition, while the short-term unemployment rate continues to edge lower, long-term unemployment has been little changed over the past six months and remains noticeably above its long-term average.”

TD Securities: "This was a very weak report, and the sharp falloff in the headline number along with the negative revisions speak to the dramatic slowing in underlying labor market momentum, feeding into the emerging narrative of weakening underlying growth momentum. For the Fed, this report will almost certainly remove any specter of a June hike, and it will raise the hurdle for a July hike."

Capital Economics: "That sound you hear is Fed Chair Janet Yellen furiously re-writing the speech that she is scheduled to give on Monday ... So is the economy suddenly plummeting into recession? No ... Nevertheless, this sudden weakness in payrolls could be enough to prompt the Fed to delay the next rate hike until September. Yellen will provide more insight on the Fed’s thinking on Monday.”"

UBS: "What about the Fed? We continue to expect the Fed to hike rates two times this year."

Sam Ro is managing editor at Yahoo Finance.

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