Today’s U.S. employment report was disappointing on many levels and almost certainly keeps the Federal Reserve on hold in June. The headline nonfarm payrolls number was an increase of only 38,000 in May, compared with the Bloomberg consensus of 160,000 and the ADP report of 173,000. Indeed, even after allowing for the temporary effect of the Verizon employees’ strike, the payroll number for May was the weakest since September 2010. Even more concerning are the substantial downward revisions to previous months’ numbers. On the brighter side, the unemployment rate fell, but for the wrong reason: a big decline in the labor force
But it is important not to overreact from one report – even a surprisingly weak one. A little perspective is in order: The chart shows rolling three-month and six-month moving averages of U.S. payroll changes. In the middle of the previous economic expansion, these moving averages were bumping along at around 187,000, and since 2014, the pattern is strikingly similar. Also note that three-month dips down to 116,000 or so were not uncommon in the last cycle; numbers then quickly reverted toward average.
However, because labor force growth in the current cycle is now much slower, it is likely – as Fed Chair Janet Yellen herself reminded us in December 2015 – that we may not see payroll employment gains revert to the higher figures we’ve seen over the past couple of years (averaging more than 200,000 since January 2014; see chart). Indeed the new standard may be 100,000 per month, or even lower, because of slow growth in labor supply.
In sum, there is nothing in this single jobs report that changes the basic view of the U.S. economy or the labor market. One data point does not make a trend. That said, all eyes here at PIMCO, in the markets and at the Fed will be on the next payroll report released on July 8.