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May Payrolls: policy normalization, interrupted
The anemic May Payrolls shattered market participants’ optimistic rate hike expectations. The 158,000 consensus expectation was previously viewed as a low bar even factoring in temporary labor disruptions (Verizon strike), but the survey figure now towers over the meager realized gain of 38,000. To make matters worse, job gains in the prior two months were revised down by 59,000.
Details within the latest report were disappointing. Labor market participation rate declined in both the aggregate and prime age (25-54) categories, and a smaller labor force pushed down the U-3 unemployment rate to 4.7% vs. 5.0% prior. The broader U-6 unemployment rate stood unchanged at 9.7% to better reflect marginally attached and part-time workers for economic reasons – figure for the latter surged to 4.06% (as a percent of the labor force) vs. 3.75% prior to erase progress made since September 2015.
Market reaction and Fed Governor Brainard’s dovish comments
Market reacted to today’s data by immediately pricing out the probability of June hike, and market-implied rate hike probability for the rest of 2016 declined to 84%. This is the level before the above-consensus April CPI, hawkish comments by Atlanta Fed President Lockhart, and the more hawkish than expected April FOMC minutes re-flattened the curve and weakened the front-end.
Fed Governor Brainard spoke next. She began her speech with references to the “sobering” jobs data, highlighting the rise in involuntary part-time workers, lower participation rate, “modest” wage growth, as well as downside risks to inflation in addition to foreign risks (Brexit, China) as reasons for prudence and further “watchful waiting.”
Sector specific analysis
May NFP – major categories (changes in thousands):
- Trade, Transportation and Utilities: 0 vs. 6 prior
- Education and Health Services: 67 vs. 46 prior
- Professional and Business Services: 10 vs. 55 prior
- Leisure and Hospitality: 11 vs. 11 prior
- Manufacturing: -10 vs. 2 prior
- Financial Activities: 8 vs. 18 prior
- Construction: -15 vs. -5 prior
- Information Services: -34 vs. 3 prior
- Mining and Logging: -11 vs. -11 prior
The Professional and Business Services sector has been the bulwark of post-08 labor market recovery, but weakness is seen in the “peripheral” services professions – Administrative and Support Service, Management of Companies and Enterprises, and Waste Management and Remediation Services all posted large declines – and this followed WSJ’s article on the slowdown in hiring by staffing agencies:
Hiring by staffing agencies has ground to a halt so far in 2016, a worrisome sign because the category fell off before a broader job-market slowdown ahead of the past two recessions. Many economists look at the sector as a leading indicator because cautious firms tend to first hire temps when an expansion begins and dismiss those nonpermanent workers when they sense the economy is faltering.
The Leisure and Hospitality sector saw a decline in two of its three biggest sub-categories. Food Services and Drinking Places rose, while Accommodation plus Amusements, Gambling, and Recreation fell.
The long-battered Mining and Logging industry is showing some signs of stability – monthly changes in Support Activities for Mining (largest sub-category) is still negative, but it appears to be stabilizing. Mining, Except Oil and Gas declined a touch.
Next article05 31 2016 | by Victor Xing | Capital Markets