Probably the most widely watched piece of economic data that comes out monthly is the employment report. As I have discussed in previous columns it is based on two surveys, one for households and the other for businesses.
The one for households is used to determine the unemployment rate, as surveyed individuals are asked whether they are working, and if not working are they looking for work. The one for employers is used to calculate the number of people who are employed.
Financial markets tend to give more weight to the survey of employers. The household survey tends to have very wide fluctuations on a month-to-month basis, which makes it difficult to draw much of a conclusion from just one month, though over several months it does provide relevant information.
Most months the report does not cause much of a reaction in the financial markets. However, sometimes expectations do change based on this report, and what was released this past week for the month of May did have an impact.
The May employment report showed an increase of 38,000 net new jobs, the smallest figure in nearly 6 years. During the month there was a strike by Verizon workers, which lowered the reported figure by approximately 35,000. Even adding back the striking workers, the May total was well below the 200,000 figure we had been averaging in recent months. In addition the April report was revised lower to show an increase of 123,000 jobs.
While job creation from the business survey was disappointing, the unemployment rate showed a decrease to 4.7% from 5.0% during the previous month. Someone hearing that the unemployment rate dropped might think that was good news, but it really was due to a large drop in the labor force, which can jump around on a month to month basis.
In a recent column I had discussed the possibility of the Federal Reserve starting to increase interest rates again. This report essentially says that the Fed will not increase interest rate in June, and the probability of a rate increase in July is now much lower.
When analyzing economic data, it is important to see if other reports are also confirming this trend in employment. There is another survey of private employers put out by ADP, which is normally fairly close to the government report.
For the month of May the ADP report showed an increase of 173,000 net new jobs, and the April figure was 166,000. These numbers were a little weaker than reports earlier in the year, but clearly did not show the significant slowdown that was in the government report.
Most likely employment growth is slowing, but the May government report was probably a one month aberration. The roughly 200,000 increase in net new jobs we have been averaging over the past year is not likely to be maintained for the balance of 2016.
Given the likely change in the amount of people entering and leaving the labor force an increase of 100,000 jobs per month will probably keep the unemployment rate about where it is now. An unemployment rate around 5% is generally considered full employment, so it is not reasonable to expect the unemployment rate to fall much from its current level.
The employment report did show average year over year wage growth increased 2.5%. This is helping to confirm a trend of wages starting to increase a little faster from the 2% figure we had seen over much of the past year.
The May employment report continues the pattern of mixed economic data we have seen in recent years, as our economy continues to show slow to moderate growth. It is not likely that this report will signify that employment growth will grind to a halt, but rather the pace of 200,000 jobs created per month is not sustainable.
Nonetheless, with relatively low unemployment the prospect for wage increases is better than it has been in some time.
