For once, ADP was right.
With the market unsure how to trade today's payrolls number, with both a very strong and a very poor report likely to spark selling, we just got the verdict: at only 75,000 jobs created in May...
... this was not only the worst print since the shocking 56,000 February report, but also 100,000 below the consensus number of 175,000. It was also below the lowest Wall Street forecast, and 4-sigma below consensus as not one of the 77 Wall Street analysts guessed a lower number, confirming broader economic weakness and boosting calls for a rate cut as President Trump’s trade wars hit the US economy.
The two-month revision subtracted a total of 75,000 jobs, as March was revised down from +189,000 to +153,000, and the change for April was revised down from +263,000 to +224,000, making it a net zero for the month and suggesting some serious deceleration in the labor market amid the trade war.
The jobs market slowdown is becoming increasingly clearer: monthly job gains have now averaged 164,000 in 2019, compared with an average gain of 223,000 per month in 2018. The 3-month average of jobs growth declined to 151k in May, the fifth sequential slowing and the smallest gain in 20 months. The post-recession average is 175k, so growth is back below a long-term trend according to Reuters' Jeoff Hall.
Looking at today's report, private payrolls added 90,000 and government dropped 15,000 amid declines in state and local education; broad-based weakness spans construction (+4,000), manufacturing (+3,000), retail (-7,600), health care and social assistance (+24,000, least in more than a year).
Adding to the slowdown, average hourly earnings also missed forecasts with just a 0.2% monthly gain (below the 0.3% expected) and a 3.1% annual rise, below the 3.2% consensus, and the smallest since September; production and nonsupervisory wages increase 3.4% for a fifth month.
Confirming that when it rains it pours, not only did wage growth slowdown, but average weekly hours remained unchanged at 34.4,missing expectations of a rebound to the average recent print of 34.5.
While of secondary importance these days, the unemployment rate held at 49-year low of 3.6% amid slight gains in both employed and unemployed count in household survey. While white and hispanic unemployment was flat, black unemployment dipped to 6.2% in May.
Separately, the underemployment rate fell to 7.1% as involuntary part-time workers drop 299,000, while participation holds steady.
Looking at the breakdown in May jobs:
- Employment continued to trend up in professional and business services and in health care.
- Employment in professional and business services continued to trend up over the month (+33,000) and has increased by 498,000 over the past 12 months.
- Employment in health care continued its upward trend in May (+16,000). The industry has added 391,000 jobs over the past 12 months.
- Construction employment changed little in May (+4,000), following an increase of 30,000 in April. The industry has added 215,000 jobs over the past 12 months.
- Employment showed little change in May in other major industries, including mining, manufacturing, wholesale trade, retail trade, transportation and warehousing, information, financial activities, leisure and hospitality, and government.
Verdict? A July rate cut is now virtually assured with the market pricing in 71% odds of a cut in the next FOMC meeting... and a 37% probability as soon as June. And while that is possible, as Bloomberg's Steve Matthews writes, "it would be inconsistent with the Fed's repeated statements that it would be "patient" in moving rates in either direction. Cutting rates at the first meeting after there's any sign of trouble wouldn't seem to qualify as patient. The more likely outcome would be a change in language that would open the door to a possible cut as soon as July."
So will the Fed cut in two weeks? According to head of US econ research at Renaissance, Neill Dutta, "I don't think it is enough for them to cut in June, but the economy has been slowing and that is showing up in the jobs market. I think it solidifies market pricing."
CIBC's Avery Shenfeld may have had the best summary of today's report:
Fed speakers have been hinting recently that they may be willing to cut interest rates given uncertainty around trade and tariffs, and signs of a slowing economy will further push them in that direction. While they are unlikely to respond to just one payrolls print, we now expect that a slower economy and continued trade uncertainty could see a cut in Q4 of this year.