An interest rate cut at the June 19 Federal Reserve meeting is now on the table as firms pulled back significantly on hiring in May. The weak hiring report is likely due to the uncertainty tax linked to trade policy out of the White House that has been placed on the economy.
While topline hiring showed a net gain of 75,000 jobs, there was noticeable weakness inside the higher-paying goods producing, manufacturing and construction numbers and downward revisions (minus 75,000) in hiring over the past two months. As a result, the gains in May were completely negated by the revisions and the three-month pace of hiring decelerated to 151,000.
Policymakers and investors should anticipate a broader deceleration in hiring in the second half of the year, likely toward the 80,000 new jobs necessary to stabilize the unemployment rate. While a rate cut at the June 19 Fed meeting is not a certainty, policymakers should anticipate the market aggressively pricing in the likelihood of a 25 basis point cut next week.
The broad deceleration across service sector hiring is of serious concern. This is the second time in four months that the economy has produced a jobs number that implies an increase in the unemployment rate in coming months as the pace of hiring slows. The Federal Reserve now has a domestic economic component to add to its decision matrix and a narrative that consists of deteriorating global economic and financial conditions, an inverted yield curve and falling bond yields.
The three-month average annualized pace of hourly earnings declined for the third straight month to 2.73 percent from 3.31 percent in February. With hours worked flat on the month, this does not bode well for the spending outlook in the second half of the year. Given the elevated level of inventories in the manufacturing sector, this poses noticeable downside risk to growth in the current quarter and the second half of the year. On the month, average hourly earnings increased 0.2 percent and are up 3.11 percent from one year ago.
Lifting the hood on this clunker of a jobs report, the data inside is even bleaker. The softness that has recently defined employment in manufacturing has now spilled over into the services sector. The evolution of job creation in the manufacturing sector is extremely troubling at this point with a net creation of 5,000 over the past three months.
The only signs of strength were in business services, which added, 33,000 jobs. Education and health expanded by 27,000 jobs and leisure and hospitality contributed 26,000 new hires. The higher-paying goods producing, manufacturing and construction sectors added 15,000 jobs in May. Trade and transport hiring was flat, retail trade shed 8,000 jobs and is down 51,000 over the past four months, while the financial sector added 2,000 jobs. There was an increase of 5,000 jobs in the temporary category.