U.S. economy added surprisingly few jobs in May, likely delaying the next Fed funds rate hike

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United States Macroeconomic and Markets Dashboard: Updated June 4, 2016

Dashboard update summary:

The employment summary released on Friday was surprisingly weak, with only 38,000 new jobs added to the U.S. economy during May and previous month figures revised down. The BLS estimate was dramatically below consensus forecasts. Many macroeconomic indicators remain positive and in line with Fed targets; households have been spending and investing more and inflation is above one percent. However, the surprise job growth weakness is sufficient to delay the expected timetable for Fed interest rate hikes.

payrolls_jun052016

Macro: GDP revised upward but business investment still strongly negative

In the second estimate, 2016 Q1 U.S. real gross domestic product (GDP) growth was revised upward to 0.8 percent from 0.5 percent. Private inventory investment did not decrease as much as previously estimated. Gross domestic investment from businesses remains strongly negative, following negative corporate profits in 2015 Q4 and very low profits in 2016 Q1. Slow real GDP growth is a result of the offset of negative business investment on sound household data. Household incomes increased in April, while expenditures decreased slightly in real terms but remain strong.

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Jobs day disappoints

Economists’ consensus view that between 100,000 to 200,000 jobs were added to the U.S. economy in May was met on Friday with a surprisingly paltry 38,000 increase estimate from the BLS. The weak data was surprising enough to cause large immediate jumps in bond and foreign exchange markets.

Meanwhile, the headline unemployment rate fell to 4.7 percent from 5.0 percent, the largest decrease in several months. The fall in the headline rate had more to do with people “leaving the labor force” than with the addition of new jobs, unfortunately. The labor force participation rate fell to 62.6 percent in May. Many of those who left the labor force had been unemployed for 27 weeks or more and where therefore discouraged enough to stop trying to find a job.

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Bond and FX markets react

Treasury bill and bond constant maturity yields fell in response to the expected delay of interest rate hikes. The yield curve (see below a simple visualization) remains relatively low and flat. The real yield on a five year treasury, for example, fell to -0.22 percent on Friday, June 3. Foreign exchange markets saw an almost universally stronger U.S. dollar in response to the jobs report. The dollar closed roughly two percent weaker against the Euro, Yen, Australian Dollar, Krone (2), Krona, and Ruble, roughly one and a half percent weaker against the Swiss Franc, Real, Lira, and Ringgit, and more than three percent against the Rand.

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Rate hike delay

Where U.S. macroeconomic data has not been thrilling, labor market strength and wage increases were, in the previous few months, supportive of a June Fed Funds target rate increase of a quarter point, to 0.5-0.75 percent. The new jobs report, therefore, softens the strongest pillar. Markets have basically taken a June hike off the table. The next jobs report will be watched very closely and will likely determine whether a July hike is appropriate. Given the timing of Fed meetings and the expected gradual increase rate, it is more likely that we only see one rate hike during 2016.

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Dashboard update: Jobs data and new uncertainty

Dashboard PDF file:

Macro and Markets Dashboard: United States (May 7, 2016 — PDF)
Dashboard Update Summary:

Jobs data for April showed payrolls continue to grow, but at a slower rate. Wage data was strong, however, the labor force participation rate gave up much of its recent improvement. Uncertainty surrounding markets and economic policy seems to have increased in the recent week, and fewer economists now predict a Fed rate hike in June. U.S. equity markets were down for the second consecutive week, while corporate bond yields rose and treasury yields fell. Recent data showed improvement in the trade balance from the weaker dollar, however, the recent depreciation trend has also become less certain.

Jobs Report showed slower jobs growth but wage improvement

The U.S. added 160,000 jobs in April, compared with 208,000 in March and 233,000 in February (both previous months were also revised downward). By sector, much of the growth came from the services side, on an annualized basis. Construction jobs, which make up less than five percent of nonfarm payrolls, were up 4.1 percent, while mining and logging jobs continued their decline and are now down more than fifteen percent over the past year (this is the smallest industry sector shown in the figure below, and represents only 0.4 percent of nonfarm payrolls). Weekly data on new jobless claims, as of April 30, showed still very low, but slightly increased, levels.

jobsector_may072016

The latest jobs report shows continued improvement in both nominal and real wages in practically all sectors. Nominal wages increased most rapidly over the past year in financial services, information services, and leisure and hospitality. On average, wages from the goods sector are higher, largely as a result of low-wage service-sector jobs in leisure and hospitality.

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Equity and Bond market conditions deteriorated

Equity markets were down for the second straight week. The S&P 500 was down 0.4 percent, the Nasdaq composite index was down 0.8 percent, and the Dow Jones industrial average was 0.2 percent lower. Volatility was higher during the week, and the VIX closed Friday at 14.7. The Shiller index of price to earnings ratios was up to 26.02 percent in April from 25.54 in March. Corporate bond yields ticked up during the week. The Merrill Lynch index of junk bond yields was up to 7.56 percent. Ten year treasury yields fell to 1.79 percent.

Economic policy uncertainty improved in April but may revert

Economic policy uncertainty, as measured by Baker, Bloom, and Davis, fell sharply in April, as there was little speculation of Fed action at the April meeting. However, I expect this index to bounce back; uncertainty will increase as the Fed June meeting and Brexit grow closer.

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Oil was down on the week, while April food prices increased

Oil prices closed lower on the week. The U.S. measure of crude oil prices, West Texas Intermediate crude front-month contracts, fell 2.7 percent during the week, to $44.66 a barrel. World food prices from the Food and Agriculture Organization (which I half-jokingly also use as a proxy of political instability) ticked up slightly in April, but remain low.

A weaker dollar improved the trade balance in March

The Fed’s trade-weighted dollar broad index against major currencies fell last Friday (April 29–past week data is released on Mondays) to its lowest level since May 2015. The year-to-date rapid depreciation of the dollar has cut import quantities, as further evidenced in the March data on trade. The trade deficit, which remains roughly 2.2 percent of GDP, improved to -40.4B in March. However, more recent foreign exchange data shows uncertainty about recent depreciation trends. The dollar was stronger against nearly all major trading partners during the past week, notably 1.2 percent against the British pound, 2.76 percent against the Canadian dollar, 3.16 percent against the Australian dollar, 4.5 percent against the Turkish lira, 3,86 percent against the Mexican peso, and 4.3 percent against the South African rand.

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Dashboard update: green shoots in March

Macro and Markets Dashboard: United States (April 2, 2016 — PDF)

The final week of March capped off a month of solid equity market gains and encouraging macroeconomic data. New data shows a continued strengthening of labor markets and a reduction in volatility. Bond yields fell during the week, and the dollar depreciated against most major currencies.

All three major U.S. equity market indices were up more than 6.5 percent on the month, while the Nasdaq composite index climbed nearly three percent during the week ending April 1. Volatility, as measured by the VIX, fell to its lowest level since August 2015. Indeed, nearly all major U.S. asset classes posted gains during the month, following a bearish January and February. West Texas Intermediate (WTI) crude oil prices jumped 13.6 percent in March, though they declined more than 2.5 percent during the most recent week.

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Manufacturing Purchasing Managers Index (PMI) data for March from the Institute for Supply Management (ISM) suggests improvement in manufacturing conditions (see above chart). The PMI, which can be thought of as the weighted percentage of purchasing managers who report positively (above 50 suggests growth), posted its first increase in six months. As a bonus, this monthly report comes with possibly the most pithy explanation accompanying any statistic:

PMI® at 51.8%

New Orders and Production Growing
Employment and Inventories Contracting
Supplier Deliveries Slower

The U.S. economy added 215,000 jobs in March, while unemployment figures ticked up slightly to five percent. However, as evidenced in the dashboard and in previous posts, an increase in the labor force participation rate tells a more complex story than an increase in the unemployment rate. A strong labor market will attract people who are otherwise not participating (someone without a job but not looking for work is not considered unemployed under the headline unemployment figure from the BLS). The labor force participation rate has experienced its first six consecutive months without decline since 2005, as people are being drawn into a decent labor market.

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Across the board, U.S. bond yields fell during the past week. The real yield curve on a five-year U.S. treasury pushed negative, reaching further than a quarter point into the red (see below). The yield on a ten-year treasury fell to 1.79 percent on Friday, from 1.91 a week earlier. Corporate bond yields in all credit segments were also down during the one-week period.

fiveyearrealyield_apr022016

Touching on some additional data, personal and personal disposable income both increased by 0.2 percent in February. The personal savings rate ticked up to 5.4 percent in February, from 5.3 percent in January. As expected, the net international investment position of the United States continued to deteriorate in Q4 of 2015. The economic policy uncertainty monthly index fell nearly 22 percent in March, providing further evidence for a reduction in uncertainty-related volatility.

Lastly, over the past week the U.S. dollar depreciated against all major non-pegged currencies. Notably, the greenback weakened by more than two percent against the Swiss franc and Canadian dollar, more than one and a half percent against the Yen, and around one percent against the Yuan during the five-day period.

Dashboard update: data marches forward

Macro and Markets Dashboard: United States (March 5, 2016 — PDF)

This week brought more strong labor market data and more relief for commodity markets. Equity markets were also up on the week, while treasury and high-grade bond yields remain low. Decomposition of broad equity market growth shows that investors are still risk-off. Value stocks have climbed while riskier investments still seem reasonably priced, providing additional evidence that risk aversion persists.

February jobs data showed continued tightening of U.S. labor markets. The unemployment rate remains 4.9 percent while the labor force participation rate increased by two tenths of a percent to 62.9, a one-year high.

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The S&P 500 closed on Friday at 1999.99, as if priced by a nineties consumer psychologist. The index climbed 2.7 percent during the week. A crude decomposition shows value opportunities favored over growth opportunities so far in 2016. Year-to-date, the S&P 500 Growth ETF is down 3.03 percent, while the S&P 500 Value ETF is down only 0.37 percent.

SP500_mar052016

Meanwhile, treasury bond yields remain very low. The real yield curve rate on a five year U.S. treasury bond was negative on Thursday, at -0.03%, and closed Friday at 0.02%. People are willing to sacrifice returns for the relative safety of government debt. Japan issued new ten year bonds with a negative yield for the first time this week. Investors clearly do expect the markets to adjust so that these safe assets provide some future positive yield, but are willing to pay the government of Japan for short-term security.

FiveYrReal_mar052016

While equity and commodity markets have become gradually less volatile over the past two weeks, foreign exchange markets continue to move in all directions, reflecting both stories–commodities relief and risk aversion. I’ve pasted below the full table from my dashboard. Over the past week, the dollar returned some of the previous week’s gains against the pound, but continued to strengthen against the euro and yen. Notably, the Brazilian real strengthened four percent against the dollar during the past week.

EXR_mar052016

 

Dashboard update: noisy week

Macro and Markets Dashboard: United States (February 6, 2016 — PDF)

Modest U.S. macroeconomic data continues to pour in, yet equity markets tumbled, possibly pricing in a steeper trajectory for the fed funds rate. JP Morgan Funds’ chief strategist, David Kelly noted in his weekly podcast that the noisy week was “unlikely to resolve issues troubling markets”.

Yesterday’s jobs report showed an increase in non-farm payrolls of 151,000 workers, bringing the unemployment rate down to 4.9%. The number of long-term unemployed was basically unchanged. The civilian labor force participation rate improved by a tenth of a percent to 62.7. Wages also improved slightly; average hourly earnings are 2.5 percent higher than a year ago.

unemp_Jan_2016

A new note from Francisco Blanch of Bank of America Merrill Lynch reminded that the oil price collapse generates an enormous wealth transfer from oil producers to consumers. Over time, this type of transfer may show up in personal savings rate or personal consumption expenditure data, however, the December personal savings rate was unchanged at 5.5 percent.

January manufacturing PMI data was practically unchanged at 48.2, however the index of non-manufacturing business activity fell more than 9 percent to 53.9.

nmi_Jan_2016

Major U.S. equity market indicators were down on the week, and tech stocks were hit particularly hard on Friday. The S&P 500 was down more than three percent during the week, and the Nasdaq composite index dropped more than five percent. Oil, as measured by front month contracts of WTI, closed Friday at $30.89 a barrel.

The dollar depreciated against most major currencies during the week, providing some relief for U.S. exporters (and policymakers). The dollar weakened more than four percent against the Brazilian Real, more than three percent against the New Zealand Dollar, and more than two percent against the Euro, Yen, Canadian Dollar, and Swiss Franc. The dollar was down roughly 1.7 percent against sterling.