A Disappointing Employment Report

Calculated Risk:

A Disappointing Employment Report: The headline jobs number was very disappointing, and there were downward revisions to job growth for prior months. The key negatives were few jobs added (only 38 thousand, although the Verizon strike cut the job growth by about 37 thousand), a decline in the participation rate, and a sharp increase in the number of people working part time for economic reasons. A few positives include wage growth, a lower unemployment rate (however, for the wrong reason - a lower participation rate), and fewer long term unemployed. ...

There are still signs of slack (as example, part time workers for economic reasons increase sharply, and elevated U-6), but there also signs the labor market is tightening (decline in long term unemployed, slight pickup in wages). Overall this was a disappointing report.

Brad DeLong:

The way to bet is that two-thirds of the surprising component of this month's employment report will be reversed over the next quarter or so.

Nevertheless: does anybody want to say that the Federal Reserve's increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was prudent in retrospect? Anyone? Anyone? Bueller?

And does anybody want to say--given that the downside risks we are now seeing were in the fan of possibilities as of last December, and given that the Federal Reserve could have quickly reacted to neutralize any inflationary pressures generated by the upside possibilities in the fan last December--that the Federal Reserve's increase in interest rates last December and its subsequent champing-at-the-bit chatter about raising interest rates was sensible as any form of an optimal-control exercise?

And we haven't even gotten to the impact of the withdrawal of risk-bearing capacity from the rest of the world that happens in a Federal Reserve tightening cycle...

Dean Baker:

Job Growth Plunges in May, Although the Unemployment Rate Fall to 4.7 Percent: The Labor Department reported that the economy created just 38,000 new jobs in May, the weakest job growth since September of 2010, when it lost 52,000 jobs. In addition, the jobs numbers for the prior two months were revised down by 59,000, bringing the average for the last three months to just 116,000.

The household survey showed a drop of 0.3 percentage points in the unemployment rate, but this is not especially good news. The decline was almost entirely due to people leaving the labor force. The employment to population ratio [EPOP] was unchanged at 59.7 percent, 0.2 pp below the peak for the recovery.

The drop in EPOPs is especially disturbing since it is among prime age workers and it is for both women and men. ... While many analysts have tried to explain this drop as a supply side story, it seems implausible... The only plausible explanation is that the demand for labor has weakened sharply. ...

Other data in the household survey was mixed. The number of people involuntarily working part-time jumped by 468,000 (7.8 percent). However the duration measures of unemployment all fell in May. The percentage of the unemployment due to voluntary quits was little changed. The number of people who chose to work part-time continued its upward path, growing by 110,000. It is now 640,000 above its year ago level.

There was little positive news in the establishment survey. ...

There is little change in the wage growth picture, with wages up by 2.5 percent over the last year, although the annualized rate comparing the most recent three months with the prior three months is somewhat better at 2.9 percent. It is important to remember that wages have been rising faster than total compensation, as employers have been reducing the generosity of their health care benefits.

Adding to the picture of weakness in this report, the one-month employment diffusion index, which shows the percentage of industries adding jobs, was just 51.3 in May, the lowest reading since February of 2010. The 3-month and 6-month indexes, which reflect employer hiring intentions, were similarly weak. The index of aggregate hours rose just 0.1 percent in May, the same as the prior two months and is actually below its January level. It would be difficult for the Fed to look at these data and say that the economy should be growing more slowly.