INDICATOR: May Employment Report
KEY DATA: Payrolls: 175,000: Private Sector: 178,000; Unemployment Rate: 7.6% (up 0.1 percentage point)
IN A NUTSHELL: "If you want to know the definition of boring, just look at the May employment report, which told us nothing."
WHAT IT MEANS: The all-important, always carefully dissected employment report was released and it was as humdrum as it gets. Payrolls rose by a little more than consensus but not by so much that we could get exited let alone irrationally exuberant. Indeed, over the past three months, total job gains average only 160,000. That is disappointing. The distribution of the hiring was somewhat confusing. Solid increases in retailing and restaurants would imply consumers are out hitting the malls and spending money. But declining manufacturing and transportation and warehousing payrolls point to a more sluggish economy. Temporary help is rising, usually a good sign, but jobs in the health profession are increasing less than expected. The ACA is expected to be a boon for medical service providers and that is starting as ambulatory care employment jumped. However, hospitals are cutting back. As for sequestration, federal employment is dropping rapidly even when you exclude the incredibly shrinking postal service. Local governments have started hiring again. The unemployment rate rose in May, in part because of an increase in the workforce. In reality, the rate "surged" from 7.51% to 7.55% a "huge" 0.04 percentage point increase. In other words, we're talking nothing here. Nevertheless, with less than stellar job gains, the still too high unemployment rate is keeping wage gains down. With basically flat wages and hours worked, income growth should be modest and that does not bode well for consumer demand.
MARKETS AND FED POLICY IMPLICATIONS: This report basically told us nothing new. We know the economy is growing but just not solidly enough to force firms to hire at a strong pace. This is allowing firms to hold down wages but while that may be good for profits, it is not good for consumer spending. A report like this should remind all those at the Fed that the economy is hardly out of the woods. I remain convince that the risk to the economy of ending the easing program too soon is significantly greater than the risk to inflation of keeping it going too long. It may be nice to have a more rational Fed balance sheet but if the economy falters as a consequence of correcting that imbalance, it could turn out to be a pyrrhic victory. An economy that is not ready for the end of quantitative easing will, by definition, be hurt by ending it. That has to harm job growth and earnings and as a result, stock prices even as interest rates rise. And that would occur in an environment of restrictive fiscal policy that shows not signs of changing. I just don't get the argument that the size of the Fed's balance sheet is the only thing of importance. As for investors, a better than expected job gain that is not excessive is probably the best of all worlds. It means the economy continues to grow but the Fed has no incentive to change policy soon.