The ADP May private sector jobs report on Thursday signaled a great BLS jobs report would come on Friday. Sometimes the ADP report doesn’t indicate how the BLS report will be. This was one of those months as the BLS report was bad across the board. It looked like the online job listings report that I showed in a previous article. That report made it look like a recession was coming. This BLS report was similar as the nirvana of a strong labor market and strong corporate earnings faded away quickly. This report didn’t affect the chances of a rate hike in June or September although there was chatter on CNBC that the third rate hike may be moved to December. I will review the potential changes to Fed policy at the end of this article.
The headline number was 138,000 jobs created which was a big miss from the average estimate of 185,000 jobs. The group think of economists combined with the strong ADP report caused this report to miss 83 out of the 84 estimates. As you can see from the chart below, this was the weakest report since March. The April and March numbers were revised lower by a combined 66,000 jobs. Often bad reports are mixed with upward revisions to past data, making it a wash, but this negative revision made it a disaster. The three month average jobs gains are 121,000.
The slowdown in jobs growth is particularly disconcerting because the year over year growth rate peaked at 2.3% in Q1 2015. The recovery is long in the tooth. The average length of time between the peak in the year over year jobs growth and the recession in the past 3 cycles has been 24.7 months. The current streak is 27 months. In 3 months, we will match the early 2000s recovery. With GDP growth set to rebound in Q2, it looks like there will be a new record set. That’s my base case expectation given the uniqueness of this economy. It’s defying logic and most recession indicators.
The major details which make or break reports were weak as well. I would argue that the labor participation rate and the wage growth are more important than the headline number because the headline can mask the weakness. The headline that the unemployment rate fell from 4.4% to 4.3% is a massive distortion from reality because the labor force shrunk. As you can see from the chart below, the labor force participation rate fell from 62.9% to 62.7%. This drop reverses much of the gains seen after the election. There was a thesis that Trump’s election encouraged discouraged workers to jump back into the labor force because they were optimistic. This theory was squashed by this report. The number of people employed fell 233,000 to 152.923 million. The labor force fell by 429,000 as 608,000 people left the labor force. The labor market lost 367,000 full-time jobs and gained 133,000 part-time jobs.
