The US economy is not slowing down, it’s getting close to full employment

We are a little bemused following the latest US Employment report. The headline figure of +38,000 jobs for May (expected: +160,000) disappointed the market, with Treasuries rallying and a June/July rate hike off the table in most economists’ views. A decline in the participation rate to 62.6% helped the unemployment rate fall to 4.7%, the lowest level since 2007, while average hourly earnings rose to 2.5% year on year.

It is well known that US Employment reports (especially the headline payrolls number) should be taken with a large pinch of salt, as the report is often subject to large revisions and has a margin of error of almost 100,000 jobs. Additionally, the Bureau of Labor Statistics estimates that the seven-week long Verizon strike had an effect of weighing on payrolls by around 35,000 jobs. These jobs may well be added back to the employment numbers next month.

Of course, this is speculation. However, unlike most reactions to the employment report, we don’t think the FOMC will be worried that the US economy is slowing. Nor do we think that May’s employment report is an indication that the US may be headed for recession. Using the unemployment rate as an indicator of possible recession, the US has not historically entered into a contractionary environment until the three-month moving average crosses the three-year moving average. As the chart indicates, there are no early signs of this recession indicator turning for now.

the us economy is not slowing down its getting close to full employment

If the US economy is continuing to expand, then there could be another reason why the payrolls numbers were disappointingly low. That is, the economy could be getting close to full employment (as an unemployment rate of 4.7% would suggest). This means that employers are finding it difficult to hire suitable workers for the jobs that are available. If this is indeed the case we would expect to see labour cost measures, like the Employment Cost Index (currently 2.4% yoy), quickly start to rise over the remainder of 2016.

The market is now pricing in a rate hike in December (moved out from July). This appears too cautious to us. As Richard has outlined previously, employment markets are healthy and the economy is probably very close to full employment. Given the inherent lag in monetary policy, it is important that the FOMC reaffirms its stance of gradually removing policy accommodation. Otherwise, it risks tapping on the brakes too late.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Categorised as: US Employment

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  1. Victoria Duff says:

    I was an institutional bond broker at PruBache back when Ed Yardeni started talking about Bond Vigilantes. I left the bond business after a visit to Chrysler when I was introduced to my new competitors — two PCs on a table with signs “Morgan” and “Salomon” — and after the crash of 1987 cleared out Wall Street.

    The bond business seems very different these days, so I thought I would add a warning based on something I learned when I was on the trading desk: You have no idea what it is like on Main Street. I love working with small business and do a lot of startup consulting, so I am in a position to see the lifeblood of this country flow from its source.

    My cost of living has nearly doubled during the last three years, without any changes on my part.

    I know a lot of people, and not one of them is a full-time employee. They are all contractors.

    I live in Beaverton, OR now — surrounded by Nike, Intel, Salesforce, Google and a whole host of tech wunderstartups. Layoffs are big and lines at the food banks are getting longer. Stores are closing. With the exception of a few lucky souls who remain working at some of the startups and other luck-favored businesses, the people are broke.

    Beware the “Gig Economy!” There isn’t full employment. Not here in one of the hot-spots of entrepreneurial activity, nor in Southern California, one of the other hot-spots. My friends in the San Francisco Bay Area report similar stories.

    A friend in ordinary residential real estate tells me she sells houses to investment funds and buyers from far-off lands, who never see the houses they buy — for cash.

    If the economy is recovering at all, it is through the efforts of those invisible souls on Main Street who, with broken and bleeding fingers, have hung on to their diminishing lifestyles by working gigs from home or part-timing at local stores. Some have been contract workers in the big companies around here, but have gone through the layoff and re-hire process several times in the last few years.

    When you talk of employers unable to hire employees they need, it brings to mind HR practices that reject anyone without perfect credit, or companies advertising open positions that don’t actually exist, or excuses for H1B visas.

    Baby Boomers can’t afford to retire and are not part of the decline in Workforce Participation.

    From what I see in the Real World, I must conclude that there are two US Economies: the real one, and the one that is created for the benefit of the elections.

    Posted on: 10/06/16 | 9:02 pm

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