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Look back at June 3, 2019 week: One soft month of payroll growth does not make a trend

A look back at the June 3 sees markets interpreting recent comments from Fed officials as presaging a rate cut, while in fact the consensus remains cautious and patient as they await the outcome of events.  Much will depend on whether the Trump Administration walks back its announced intention of increasing tariffs with Mexico and if there is progress in trade negotiations with China. Markets are clearly hungry for one – or more – “insurance” rate cuts. Whether a cut is determined on depends on how the FOMC interprets data and developments.

The ADP National Employment Report for May released Wednesday jolted markets with a way below expectations up 27,000 in private payrolls. This prepared markets for a below expectations reading for the BLS Employment Situation on Friday, which is what they got. The establishment survey put overall payroll growth at up 75,000 with private payrolls up 90,000 and government down 15,000.

One month of softer payroll growth isn’t a trend and will not in itself sway the FOMC toward providing an insurance cut in short-term rates. At most it will elevate policymakers’ willingness to provide a bit more accommodation without necessarily bringing the consensus to conclude it is time to act. It is the behavior of payrolls over time that will be part of the data to persuade the FOMC to cut – or not.  It is not unusual for a slow month to insert itself into a string of firmer gains in payrolls. May is likely to prove to be that.  US payrolls haven’t seen a down month since September 2010 and the economy remains in expansion, albeit at a slower pace. On the other hand, the unemployment rate held at 3.6% for a second month, maintaining near 50-year lows and a sustained undershoot of the FOMC’s longer run expectation of 4.3%. There may be a debate about slack remaining in the labor force, but there won’t be that if there is, present conditions will continue to chip away at it.

Data on initial jobless claims for the week ended June 1 suggested that businesses are continuing to hold on to workers. Levels of new filings remain low in the historical context and consistent with a healthy labor market. The insured rate of unemployment hasn’t budged from a 1.2% reading for over a year.

The May Challenger report on layoff intentions indicated that companies are working to restructure their labor force. This includes reducing payrolls in several industries, notably the tech and telecom sectors. The report said that as part of restructuring, some businesses are offering voluntary severance/early retirement in an effort to move older – and often higher paid – workers off payrolls to make room for younger – and possibly lower paid – workers who have the necessary skillsets. In any case, at present laid off workers are facing a vibrant labor market and should have little difficulty in finding work. This does not suggest a deterioration in the economy so much as businesses trying to remain cost-efficient.

The Fed’s Beige Book certainly did not point to any particular softening in the labor market over the survey period (early April through late May). It said, “Employment continued to increase nationwide, with most Districts reporting modest or moderate job growth and others reporting slight growth, an assessment similar to the previous reporting period,” and mentioned that job growth is “constrained by tight labor markets, with Districts citing shortages of both high- and low-skill workers”. It also said competition in the labor market was exerting modest upward pressure on wages and benefits.

The picture for economic activity across the 12 Districts was somewhat muddier in the present Beige Book from the prior one. On net the report sounded more upbeat for those Districts that reported improved conditions, and only a tad less good for those who downgraded their assessment. Nonetheless, only 11 of the 12 Districts said growth was present to some degree in the current report after 100% in the prior edition.  Still, the June 5 report was for far from weak conditions overall.

The ISM Manufacturing Index for May dipped slightly to 52.1 from 52.8 in April. It was a little below expectations, but not significantly so.  The index components were not bad relative to the prior month with somewhat higher new orders and firmer employment. Production was down a bit in response to slower new orders in the prior month, delivery times were faster in part because transportation of goods was less affected by flooding in the Midwest, and inventories narrowed to near neutral after businesses swiftly responded to slower conditions. Expansion in the factory sector continues even as upward momentum eases off.

On the other hand, the ISM Non-Manufacturing Index turned higher to 56.9 in May after 55.5 in April. The index components pointed to firmer business activity, an uptick in new orders, stronger employment, and supplier deliveries just below neutral. Overall the readings put the service sector on a footing for moderate growth.

New orders for factory goods in April declined 0.8% after rising 1.3% in March. Durables were down 2.1% and nondurables up 0.5%. On the durables side, the transportation sector (down 5.9%) continues to be the swing factor for orders with weakness in new aircraft orders particularly prominent. For nondurables, petroleum costs are moving the dollar value of orders.

Sales of motor vehicles in May offered an upside surprise among the week’s data. Total vehicle sales rose to 17.3 million units (SAAR) after 16.3 million in April. The share of sales of passenger vehicles of 4.777 million units in May was about 28% of the total, while light trucks – which includes minivans, SUVs, and crossovers – was up to 12.530 million units which was about 72% of all sales. Consumers continue to prefer pricier-to-buy and costlier-to-own light trucks in spite of fluctuations in gasoline prices which can help drive buying decisions.

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