In recent weeks, various Fed officials have been jawboning for higher rates, which has created volatility and riled up investors around the globe. But the latest data suggests that this “data dependent” Fed may not have the pass it needs to move forward.
The latest jobs report was without question disappointing (only 38,000 jobs created), but what’s even worse is that it appears this latest reading may not be an anomaly, but rather the continuation of a deteriorating trend.
Read Why Big Job Misses Are Likely to Continue
The chart below, courtesy of Trading Economics, shows US nonfarm payroll growth by month. The dotted line is a “best fit” line and the blue highlighted area represents a forecast range based on the volatility in monthly payrolls.
Even without the added notations, you probably don’t need a stats degree to see where the trend is heading.
But before we get ahead of ourselves and assume the economy is about to come to a screeching halt, remember that the job numbers tend to bounce around a lot, and they’re seasonally adjusted, which adds another layer of distortion.
A longer term view demonstrates this volatility and also shows us that this is not the first time we’ve had a weak jobs report during this expansion. Looking back over the last 5 years, we can see a few instances where for whatever reason, hiring simply had a bad month.
And consider this: according to the Wall Street Journal, there is a huge margin of error around these monthly reports. For the May report, the Bureau of Labor Statistics is only 90% confident that its final figure (38,000 jobs) is right to within 115,000 jobs.
In simple terms, this means that the actual figure could be anywhere between a loss of 77,000 jobs to an increase of 153,000 jobs. Not only that but one out of every 10 times, the actual result will be outside that range. How’s that for accurate, market moving data?
I will say that what makes this latest report a bit more alarming is the fact that the last 8 months have seen steadily decreasing job growth. In previous instances where jobs data came in weak, it looked like job growth had been pulled forward or backward by a month, giving the impression that the weak month was more likely an anomalous data point rather than a sustained trend. This time, it appears less likely that’s the case.
Read also Chad Syverson Busts the Labor Productivity Mismeasurement Thesis
Regardless, judging by the market’s reaction yesterday, investors are apparently more worried about a tightening Fed than they are about a deteriorating labor market. Nothing like collapsing job growth to give stocks a boost!
We typically look at labor market data from an absolute perspective, as in the charts above, but looking at the growth rate in jobs can help add context.
Notice in this next chart that job creation accelerates coming out of a recession peaks toward the end of a cycle, and begins heading down prior to the next recession.
On the right side of the chart notice that the growth rate in jobs peaked at the end of 2014 and has since been heading lower. If the growth rate continues to decline, it may be yet another signal that this expansion is in its final stages.
Before moving on, I want to highlight one more chart that shows the difference between part-time and full-time jobs created over the last seven years.
While the total number of part-time jobs still outnumbers full-time jobs, the net creation of full-time jobs has far surpassed that of part-time jobs since the financial crisis … not the story we typically hear.
When the US economy stumbles and the prospect of rate hikes diminishes, the dollar takes a nosedive. That’s exactly what happened on Friday, with the dollar index falling 1.6%. In currency terms, that’s a substantial move, and a blessing for our manufacturing and export sectors, as well as commodity prices.
In fact, just when we thought nobody wanted commodities anymore, the CRB index decided to take off. Commodities have been in a healthy uptrend since the February bottom, market by higher highs and higher lows. So far the trend looks poised to continue, which would be a blessing for energy and material companies.
Federal Reserve Chairwoman Yellen acknowledged yesterday that the weak May employment report has raised many questions about the economic outlook. She believes that “the economy is continuing to improve” but cannot discount uncertainty regarding whether the slowdown in hiring is temporary or indicative of shifting dynamics.
You may also like Jim Puplava’s Big Picture: The Coming Obama Recession
Either way, it appears that a rate hike at the FOMC meeting next week is off the table for now. Time to hit the reset button and wait for more data.
The preceding content was an excerpt from Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
