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June Commentary: The Curious Incident of the May Jobs Report

The jobs report. The monthly stress test issued by the Bureau of Labor Statistics (BLS) that provides metrics to the central question of the current election cycle, "How is the US economy doing?" The dependent relationship between employment and our economic health cannot be denied, nor should it, but as pundits and candidates alike seem hell-bent on confusing the matter, it is important to look beyond the rhetoric to find out what the data actually tells us.


The easiest conclusion to draw from May's report is to proclaim that the economy is going to hell in a hand basket. After all, it was the lowest job creation number issued by the BLS since 2010, underperforming its goal by nearly 70%. You might be asking yourself, as I did, how can that be? One theory being batted about is that maybe, just maybe, it is a signal that the economy has largely given a job to the vast majority of the people who want one.


While we all know people who are still looking for work, it is entirely possible that the odd May jobs statistic is showing a tightening of the market. Unemployment rates are at a generational low of 4.7%. Wages are up 3.2% during the first five months of 2016.  Both represent signals that workers have a bit more pricing power than they did a year ago. If these numbers stick (which we won't know for a bit) we could be entering an economy where employers have trouble filling open positions at a salary and speed that is comfortable, instead of an economy where jobs are falling off the table and/or people are too discouraged to even look. That is a major shift that can only be looked at as a positive sign for the economy.


While it could represent a major economic shift, it could also be an anomaly that will soon correct itself. There are errors in the measure, to be sure. For example, the Verizon strike, which sidelined 35,000 workers, was factored into the data for some bizarre reason. So unless those workers never come back to work (which we know is not true, because the strike has been settled since those numbers were released), you can cut nearly half of the job creation deficit for May in half. 


And still, there seems to be yet another 800-pound gorilla in the room—the current political climate and the toll it might be having on the jobs market. There is no question that the worst trait for a thriving economy is uncertainty. It paralyzes the investment market, stalls the job market, and allows fear and doubt to become a central factor in governmental policy, as evidenced by the Fed's continued hesitation to raise interest rates in the current environment.


On one side, you have a candidate who has put forward plans to increase trading tariffs on Mexico and China, raising fears of a global trade war. On the other side, you have two candidates who have starkly different plans for the corporate sector: one that the sector believes would be closer to the norm (which may shift depending on the rest of the primary season and convention), and one that the sector fears could reduce their ability to show profits substantially. With so much unknown during a time when there has typically been at least a semblance of clarity, many believe that budgets and hiring plans for most employers have been paused and that companies who might otherwise be adding jobs are taking more of a "wait and see" approach.


So what can we expect? Well, before the report, it seemed likely that the Fed would look to raise interest rates at their June or July meetings. Since they are not in the habit of adding debt to the market when there is uncertainty in the jobs report, it is likely that this kicks the interest rate can down the road. However, if May's report becomes a trend, and the Fed believes that it signals health in the jobs market, as many economists have suggested, then the first of two, three, or four interest rate hikes might come to be sooner rather than later.

Either way, the Verizon strike over and the primary season is (mercifully) reaching its end so don't be surprised if the report looks better in the near future. That is probably why the market didn't react much to the shockingly low jobs numbers. It was the market's way of telling us all to take a deep breath and carry on. 




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