• The 75,000 payroll employment gain in May was well below expectations, and was accompanied by a net downward revision of 37,000 to March and April numbers.
• Wages rose only 0.1%, and their year-on-year increase edged down to 3.7%.
• The workweek shortened, and total hours worked fell 0.2%.
• The only sign of strength was in the unemployment rate, which fell to 4.6%, as the household employment count rose 288,000.
• We still think that the Fed has a bit more work to do, with core consumer price inflation creeping higher, but the door is now open to a pause on June 29.
• Inflation figures due in mid-June will be key in determining whether the Fed does indeed take a break from rate hikes in June.
• The weak report is consistent with our view that GDP growth will slow to 2.7% in the second quarter, from 5.3% in the first.
• Equity markets will take comfort from the possibility that the Fed is near the end of its rate hikes. But perhaps they should also consider the possibility that the economy is slowing down more severely than anticipated. That would be good news for bonds—but it is hard to see how it would be good news for equities.

Payroll employment rose just 75,000 in May, the weakest increase since last October, when the labor market was still feeling the after-effects of the hurricanes. Compared with April (when a downwardly revised 126,000 jobs were added), the key swing was in the goods sector, where jobs fell 10,000, instead of rising 45,000. Manufacturing lost 14,000 jobs, reversing almost all of April's 19,000 increase. Construction added just 1,000 jobs, with residential construction employment edging slightly lower, consistent with weakening new home sales and declining housing starts. Mining employment rose 4,000 on job growth in oil and gas operations support activity, but this gain was lower than in April (10,000).

Employment growth in private service industries was 77,000 in May, better than the 72,000 increase in April, but still a disappointment because the April number was well below previous months. Retail trade (down 27,000) had its second large drop in a row, widely spread across the detailed categories. Employment growth in food services and drinking places eased back again, to 10,000. The weakness in retail and in "eating and drinking out" suggests that higher gasoline prices are biting into discretionary consumer spending.

The report showed a lessening of the wage inflation threat, as hourly earnings rose just 0.1%, after jumping 0.6% in April. The yearly rate of growth in earnings eased back to 3.7%, from 3.8%. Hours worked mirrored the weakness in payrolls, with the workweek declining and overall hours worked dropping 0.2% on the month. While good news for inflation, the slower growth in earnings, combined with a decline in hours, points to no growth at all in wage and salary incomes during May—bad news for consumer spending power.

There was one exception to the gloomy picture: the unemployment rate fell to 4.6%, from 4.7% in April, as the household survey measure of employment rose by 288,000. Over the last three months, household survey employment has risen at an average rate of 240,000 per month, while payroll survey employment has risen by an average 125,000. We do believe that the payroll survey is the more accurate indicator of the state of the labor market, but the household survey figures do give a hint that the market may not be quite as soft as payrolls indicate.

The weak employment report suggests a slowing economy, consistent with Global Insight's expectation that GDP growth will downshift to 2.7% in the second quarter, from the very strong 5.3% pace in the first quarter. It will raise hopes that the Federal Reserve can stop hiking interest rates soon. We still think that the Fed has a bit more work to do, with core consumer price inflation creeping higher, but it may not now need to raise rates two more times (to 5.50%), as our June forecast assumes. Looking to the next Fed meeting, the door is now open for a pause on June 29—although key inflation reports on the PPI and CPI are still to come in mid-month, and will determine whether the Fed feels able to hold its fire.

Equity markets will take comfort from the reduced inflation threat and from the possibility that the Fed is at or near the end of its rate hikes. But perhaps they should also consider the possibility that the economy is slowing down more severely than anticipated. That would be good news for bonds—but it is hard to see how it would be good news for equities.

Raul Dary

24 Hartwell Ave.
Lexington, MA 02421, USA
Tel: 781.301.9314
Cel: 857.222.0556
Fax: 781.301.9416
raul.dary@globalinsight.com

www.globalinsight.com and www.wmrc.com