May’s pitiful jobs report ends hopes for June rate hike

Well, if you thought that the Fed might raise interest rates in June, think again.

The U.S. economy added a mere 38,000 jobs in May (and no, that is not a typo).  And March and April’s jobs numbers were both revised downward a combined 59,000. The unemployment rate, on the other hand, dropped to 4.7 percent. But our Solman Scale U7, a more comprehensive measure of un- and underemployment, actually rose slightly to 12 percent.

For those of you who regularly tune in, that 38,000 jobs added number is “unambiguously weak,” as economist Mohamed El-Erian of Allianz called it.

“Nobody was expecting that,” said economist Justin Wolfers of University of Michigan. In the three months prior to May, the economy was adding 200,000 jobs per month on average.

READ MORE: How long will the Fed have to ‘fiddle’ with interest rates?

And that 4.7 percent unemployment rate might look good — until you understand the reason it dropped: the labor force participation rate, which was already near historic lows, decreased by .2 percent. For El-Erian, that number is more worrisome than the headline number. “That means that people aren’t coming back into the labor force” — i.e., aren’t looking for work, said El-Erian.

But as we always say here, don’t put too much stock in one month’s numbers. And it’s worth noting today, especially, that the margin of error in the payroll survey is plus or minus 100,000.

An unusual factor impacted May’s jobs report and led to the decline of 34,000 jobs in information services. Beginning on April 13, Verizon workers went on strike for six-and-a-half weeks. While the survey was conducted for May, about 35,000 telecommunications workers were striking and not on company payrolls.

Economist Diane Swonk, founder of DS Economics, points out that such losses are not permanent.

Even so, it looks like employment growth might not be what it used to be.

The job gains have averaged 116,000 jobs per month over the past three months, down from 207,000 jobs for the same period a year ago.

If you look at job growth over the past six months, things appear to be a little better: an average of 150,000 jobs gained per month. The White House noted as much, trying to put a positive spin on today’s numbers.

“The longer term trends continue to indicate that the United States economy is the strongest, most durable economy in the world,” the White House’s Josh Earnest told CNBC, reminding us of Republican economist Douglas Holtz-Eakin’s great line last year about the U.S. economy in a global context as “the best-looking horse in the glue factory,”

Today’s numbers, however, don’t seem strong enough for the Federal Reserve to raise interest rates and try to slow an overheated U.S. economy. Most commentators think May’s jobs report effectively wipes out any chance of the Fed raising interest rates during their June 14-15 meeting.

It doesn’t, however, take an interest rate hike off the table for July, said both Wolfers and El-Erian. The Fed is data dependent, said Wolfers, and if presented with better data in July, its stance may shift.

There is at least one number today that can be interpreted positively: wage growth. Following a 9-cent gain in April, average hourly earnings increased by 5 cents last month. That means wages have increased by 2.5 percent over the year, while inflation has been negligible.

So one way to interpret the data is that the disappointing job growth in May was partly due to the Verizon strike, due to measurement error and partly due to slowing job growth, said Wolfers. How much is due to economic growth? Not clear. “Any of them could be the dominant force,” he said.

El-Erian sees three interpretations: 1) low demand for labor, which would mean the economy is weakening; 2) May’s jobs report is an outlier; 3) we have a problem with the supply side of the market. The last is worrisome, because it suggests that there are people out there who want to work but simply don’t have the skillset to get full-time jobs.

The bottom line?

“It’s bad news, but don’t freak out,” said Wolfers. “Employment is still growing at a rate to reduce unemployment.”