Jobs Report Stinks: No Fed Rate Hike in June

The May jobs report was a stinker. The economy added just 38,000 jobs, the fewest since September 2010. Even adding back the 37,000 jobs lost in the telecom sector, which was primarily due to the recent Verizon strike, May was a dismal month for hiring. Adding to the downbeat news, revisions of March and April reduced jobs by 59,000, pushing down average monthly job creation for 2016 to 150,000, well behind the more than 200,000 thousand gains seen over the past few years. Although the year-over-year change in May was an impressive 2.39 million jobs, the recent trend is worrisome: Over the past 3 months, job gains have averaged 116,000 per month. Additionally, the unemployment rate fell to 4.7 percent, the lowest level since November 2007, but that was due to more people dropping out of the workforce, not because a slew of wannabe employees got jobs. Unfortunately, the weakness was widespread. Manufacturing lost 10,000 jobs, construction shed 15,000 jobs and temporary help fell by 21,000.

Despite recent comments by Fed officials extolling the improvement in the economy, the weakness in this report likely means that the central bank will not raise rates when it meets in a week and a half. It also calls into question the health of the overall recovery in the second quarter, which is estimated to accelerate by about 2.1 - 2.3 percent on an annualized basis.

In the first quarter, we could attribute the paltry 0.8 percent GDP to plunging oil prices, a stronger U.S. dollar and weakness in China. But those factors have largely turned around: crude has soared from $27 per barrel to nearly $50; the dollar has stabilized after rising sharply against other major currencies in late 2014 and early 2015; and although Chinese growth remains on the worry list, there has been a simmering down of tensions.

The economic expansion celebrates its seventh birthday this month, making it the fourth longest recovery since World War II. Although the recovery has been sluggish—GDP has averaged just over two percent a year, the labor market has shown more impressive progress, until recently. Whether or not this is the beginning of the end for the robust gains in job creation is unknown at this point. What’s seems knowable is that the Fed is not going to raise rates amid the current environment.

Last week, Fed Chair Janet Yellen said that the central bank would likely to raise interest rates “gradually and cautiously” because raising them too quickly could trigger a downturn to which the Fed may have limited tools to respond. Given this report, it would seem that caution would be appropriate at the June meeting.

MARKETS:

• DJIA: 17,817 down 0.4% on week, up 2.2% YTD
• S&P 500: 2000 flat on week, up 2.7% YTD
• NASDAQ: 4942 up 0.2% on week, down 1.3% YTD
• Russell 2000: 1164, up 2.5% on week, up 2.5% YTD
• 10-Year Treasury yield: 1.7% (from 1.8% a week ago)
• July Crude: $48.62, down 1.4% on week
• August Gold: $ 1,242.90, up 2.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.35 (from $2.32 wk ago, $2.76 a year ago)

THE WEEK AHEAD:

Mon 6/6:

Janet Yellen speaks

Tues 6/7:

8:30 Productivity and Costs

3:00 Consumer Credit

Weds 6/8:

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Thursday 6/9:

Friday 6/10:

10:00 Consumer Sentiment

2:00 Treasury Budget