The US labour market theme of the past 18 months had been that despite the manufacturing and energy sector recession, the more domestic-oriented parts of the economy, such as services and construction, were doing quite well. After analysis of the non-farms payrolls data published on 3 June 2016 that argument looks tenuous to me.
In the period between February and early June 2016 we have seen consecutive declines in payrolls growth in the internal-facing sectors of the economy, from a recent high of 252k in February to just 93k in May (data published 3 June 2016, adjusted to take into account the impact of the Verizon workers’ strike in the May numbers). This trend is visible across a number of service sectors – Professional and Business services, Financial Activities, and Leisure/Hospitality. Retail trade job growth was better in May than in April, but is still significantly lower than it was a few months ago. Note that exhibit 1 below adjusts for the Verizon strike.
Exhibit 1: Jobs growth by sector – all of a sudden, internal-facing parts of the US economy (e.g. the more domestic-orientated sectors such as services and construction), have lost momentum (the data shown is based on a three-month moving average)
Looking at exhibit 1 above, within a multi-year context, internal-facing jobs growth on a three-month moving average basis is still well within the range of recent years. Over this period, we have had these types of month-over-month swings in service sector jobs growth. Seen this way, a key issue remains that jobs growth in the manufacturing and oil and the mining sectors continues to struggle, and indeed has gotten a bit worse lately. Unfortunately, this weakness may be compounded going forward by a loss of momentum in service-related sectors – that is, services sector jobs growth may no longer provide such a large offset to the weakness in job creation in external-facing sectors. The employment component of the ISM non-manufacturing survey published on 3 June 2016 also suggests a continuing loss of momentum in services sector job growth in recent months.
In February I had pushed out to September my call for a next Fed rate hike. Admittedly, I had begun to waver on that call recently in light of Fed communications and the very low bar the FOMC had appeared to set for a summer rate hike. The non-farms payroll data published on 3 June 2016 makes me feel comfortable retaining my September rate hike call, though July still remains a possibility. Overall, my view remains that a true risk management approach argues for continuing to delay raising rates – with very weak global growth, a loss of momentum on the labour front, plenty of distance between PCE inflation and the two percent objective, and low inflation expectations, raising rates any time soon would be a policy decision of choice, based on highly uncertain forecasts, as opposed to a decision of necessity. This is especially the case within the context of the proximity of the lower bound and unpalatable policy options should the economy lose significant momentum. [divider] [/divider]
This article was written on 3 June 2016, in New York City.