Payroll Postmortem

In perhaps the under-statement of the year, BofA's Economics group note that "May's unemployment report was a disappointment" with evidence of a weather reversal and weakness concentrated in construction, leisure, and temporary help. Pointing out that "This is the recovery of fits and starts", BofA believes we are entering a slow patch in the second half of the year. They do not see this report as sufficient to prompt Fed action in June, but it makes August QE increasingly likely. The weakness in the US data is overlapping with an intensifying crisis in Europe, which means the risk-off trade continues.

From BAML Economics:

Payroll trend is slowing: The economy added 69,000 jobs in May, and April and March were revised down a cumulative 49,000. This provides an offset to the solid gains of 250,000 during the winter. We believe this is largely a weather payback. In our view, the underlying trend in payrolls is close to 125,000.

Weather reversal: There was clear evidence of a weather payback, with construction jobs down 28,000, leisure/hospitality jobs down 9,000 and temporary hiring only up 9,000. All three of these sectors had seen solid job growth during the winter.

Unemployment rate higher: The unemployment rate increased to 8.2% (8.206) from 8.1%, as a gain in the labor force offset an increase in household employment. The labor force jumped 642,000 after two months of sharp declines; this may be partly explained by students entering the labor force. Looking past the monthly noise, we believe the labor force participation rate will head lower as long as job growth remains sluggish.

Signs of stress: The median duration of unemployment increased to 20.1 weeks from 19.4, showing signs of distress in the labor market. Long-term unemployment leads to skill depreciation and makes it more difficult to ultimately find employment. In addition, there has been a continued rise in part-time jobs, which shows how cautious businesses have been.

What does it mean for the broader economy? Spare capacity has translated to soft wage growth. Average hourly earnings were only up 0.1% mom or 1.7% yoy, which means continued weakness in income growth. Moreover, with the three-month trend in aggregate hours worked running just 1.0%, today’s employment report suggests downside risk to Q2 GDP. This is the beginning of the slowdown, which we expect to translate to only 1.0% GDP growth by Q4.

Fed will respond, in time: While it increases the chances, we do not believe today’s report is sufficient to prompt Fed action on June 20. However, we think it is increasingly likely the Fed will announce another round of QE at the August 1 or Sept 13 meeting. The Fed will not sit idle as the economy slows.