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Jobs Report Is Weak, With Gain of 75,000; Unemployment Rate Still 3.6% A Weak Jobs Report Poses a New Challenge to Trump: A Slowing Economy
(about 8 hours later)
75,000 jobs were created last month. Analysts had expected a gain of about 175,000 jobs, according to Bloomberg. Lawmakers, business executives and economists have all tried to warn President Trump that his trade policies could hurt growth. On Friday, the government reported that employers added just 75,000 jobs in May, a fact that will be hard for him to ignore.
The unemployment rate was 3.6 percent, the same as in April. The increase was a far cry from what economists had expected and a fraction of the number of jobs created in April. The weakness was most evident in sectors that depend on exports, and analysts were quick to blame Mr. Trump’s tariffs on China and other countries.
Average hourly earnings rose by 0.2 percent, the same rate as in April. Over the last 12 months, earnings have risen by a solid 3.1 percent. The new data from the Labor Department also increases the likelihood that the Federal Reserve will cut interest rates, and is the latest sign that the economy is slowing.
The latest report was a disappointing showing that will stoke fears the economy is softening as the Trump administration’s trade war with China and potentially Mexico escalates. “This should be a clear warning to the administration and the Federal Reserve to tread very carefully on the policy front,” said Scott Anderson, chief economist at Bank of the West in San Francisco. “The May jobs report gives us a taste of what’s ahead if these trade threats continue.”
The Federal Reserve has signaled that it would consider a rate cut in the event of economic weakness, and May’s data is likely to be an important factor in their decisions. The economy started the year strong, expanding by 3.1 percent in the first quarter, and the payroll figures don’t suggest that a downturn is imminent. The current recovery has defied recession predictions several times, and this month it tied a record for longevity with the boom of the 1990s.
“This gives us a real sense of deceleration in the U.S. economy,” said Diane Swonk, chief economist at accounting firm Grant Thornton. “We knew this was occurring, but this could be a summer of discontent. It also gives the Fed a green light to cut rates.” Nor was the news all bad. Unemployment was unchanged at 3.6 percent, the lowest that number has been in about 50 years. And average hourly earnings increased by 0.2 percent, which was less than expected but better than earlier in the recovery.
Most analysts expect the economy to slow in the current quarter, after a growth rate of 3.1 percent in the first three months of the year. Both retail sales and factory orders declined in April, a sign that consumers and businesses are growing more cautious. Monthly jobs data can be volatile, with big swings already in January, February and March of this year. But the slow pace of hiring in May followed other disappointing indicators. Oil prices and yields on Treasury bonds have both plunged, which suggests traders expect slower growth.
However dramatic the fall off in hiring was in May, it’s part of a larger trend suggesting that the labor market has cooled from last year, when tax cuts provided a short-term lift. In the first five months of 2019, the economy added an average of 164,000 jobs, down from an average gain of 223,000 for all of 2018. The huge corporate tax cut enacted in late 2017 served as a tailwind for the economy in 2018 and early 2019, but the impact is beginning to fade. In the first five months of 2019, the economy added an average of 164,000 jobs, down from an average gain of 223,000 for all of 2018.
The retail sector, battered by the rise of e-commerce, lost jobs for the fourth month in a row. The sector has given up 50,000 jobs since January. What’s more, retail sales and factory orders declined in April, an indication that consumers and businesses are becoming more cautious. The jobs report on Friday also revised down hiring data in March and April by 75,000.
The share of Americans working or looking for a job was unchanged at 62.8 percent. Some economists had thought that number would rise as people were lured back into the labor market by signs of growth earlier this year. “Over all, the economy is on a fragile footing,” said Lindsey Piegza, chief economist at the investment bank Stifel. “We’re still talking about solid growth at the start of the year, but that’s in the rearview mirror. The name of the game is uncertainty.”
Friday’s report also revised employment data for April and March downward by a total of 75,000 jobs. At big companies, tariffs are the leading cause of those jitters. The Trump administration has been putting pressure on China for months, but tensions increased last month when negotiators failed to reach a deal and the administration raised tariffs on $200 billion worth of Chinese imports.
“Over all, the economy is on a fragile footing,” said Lindsey Piegza, chief economist at the investment bank Stifel. “We’re still talking about solid growth at the start of the year but that’s in the rearview mirror. The name of the game is uncertainty.” The threat of tariffs against Mexico is new. On May 30, the Trump administration said it would place duties on imports from that country to compel it to halt the flow of Central American immigrants to the United States.
President Trump’s escalating trade war with China and the possibility of new tariffs on Mexican imports have unsettled the financial markets. Analysts are parsing the data for any sign that his policies are hurting the economy or are making employers more cautious about adding workers. That announcement came after the Labor Department conducted its employment surveys for May. But those tariffs, which are scheduled to go into effect on Monday, are certain to hurt many businesses.
“The May jobs report gives us a taste of what’s ahead if these trade threats continue to escalate,” said Scott Anderson, chief economist at Bank of the West. “Hiring faded across the board in May. This doesn’t appear to be a one-month pattern.” “The shift to Mexico was totally unexpected, and it caught people by surprise,” said Neil Bradley, chief policy officer at the U.S. Chamber of Commerce. That effect, he said, was heightened because it came in a statement from the White House, “rather than as an aside to the press or a social media post.”
Michelle Meyer, chief United States economist at Bank of America Merrill Lynch, said she was evaluating job creation in the goods sector, relative to hiring in service industries. “If global weakness or the trade war filters in, it’s going to have a bigger impact on the goods side of the economy,” she said. Senate Republicans are already in revolt over the prospect of tariffs on Mexican imports, and the May hiring figures could make it more difficult politically for Mr. Trump to further escalate trade disputes.
Indeed, hiring in goods-producing industries like manufacturing, mining and logging, and construction slowed to a crawl in May, while the services sector showed vigor. The professional and business services category registered a 33,000 increase in payrolls while health care added 24,000 jobs. “People aren’t buying the idea that tariffs are good for the economy,” said Aparna Mathur, a resident scholar at the American Enterprise Institute, a right-leaning group. “I hope these numbers would make the Trump administration more cautious and have some impact on their decision to impose tariffs, whether it’s China or Mexico.”
Ms. Meyer’s economic forecast calls for growth to slow to less than 1.5 percent in the second half of the year. On Friday, Mr. Trump did not comment on Twitter about the jobs report after it was released, breaking from his usual practice. But he said that a 5 percent duty on Mexican imports would go into effect on Monday unless the country agreed to a deal under which it would buy American agricultural products “at very high levels, starting immediately.”
Not all tariffs are created equal, said Neil Bradley, chief policy officer at the U.S. Chamber of Commerce. The threat of new duties on Mexican imports poses different risks than the tariffs imposed on China. The duties on China and other countries have already forced large manufacturers, home contractors and other businesses to pay higher prices for components and basic materials. Analysts believe that businesses will eventually have to pass these higher costs on to consumers by raising prices.
The China tariffs have been building for months, but many business leaders believe Mr. Trump could reach a deal with President Xi Jinping. “It may not lead to firing but it may cause businesses to postpone hiring,” said Michelle Meyer, chief United States economist at Bank of America Merrill Lynch.
“The shift to Mexico was totally unexpected and it caught people by surprise,” Mr. Bradley said. That effect, he said, was heightened because it came in a statement from the White House, “rather than as an aside to the press or a social media post.” Ms. Meyer’s economic forecast calls for growth to slow to less than 1.5 percent in the second half of the year. In the current quarter, she estimates the economy will grow by 1.9 percent; other analysts think growth will be closer to 1 percent.
For policymakers at the Fed, who are meeting later this month, the May numbers could be significant. On Tuesday, Jerome H. Powell, the central bank’s chairman, hinted that policymakers were prepared to cut rates if the trade war hurt the economy. She has been keeping a close eye on job creation in the goods sector, relative to hiring in service industries. “If global weakness or the trade war filters in, it’s going to have a bigger impact on the goods side of the economy,” she said.
Until relatively recently, the expectation was that the Fed would continue raising its benchmark interest rate, something it started doing in December 2015. The Fed changed course in January, with Mr. Powell suggesting that very modest inflation and weakness in Europe and China warranted a neutral stance. Manufacturers are among the most sensitive to the rhythms of international trade, depending on foreign companies as suppliers and customers. China and Mexico have been important parts of their supply chains for years, and it won’t be easy for these companies to find alternatives.
The stock markets took Mr. Powell’s remarks on Tuesday as a sign that the next Fed move might be a rate cut, prompting a rally. The weak showing for May will only fuel speculation that a rate cut could be imminent, perhaps as early as the central bank’s next policy meeting on June 18 and 19. Retaliatory tariffs imposed by other countries have also made American exports less competitive on world markets. It’s perhaps not surprising, then, that factory employment is up just 30,000 this year, compared with a gain of 110,000 in the first five months of last year.
[From The Upshot: The jobs report and the market suggest that the Fed went too far in tightening rates last year and offer new grounds for the central bank to pivot.] Hiring in sectors like manufacturing and mining and logging slowed to a crawl in May, while the services sector showed vigor. The professional and business services category added 33,000 jobs, and health care added 24,000
In the financial markets, investors saw the bright side of the disappointing report, with bond markets pricing in a growing likelihood that the Fed would act to cut interest rates. Yields on short- and long-term Treasury securities fell sharply after the report. The yield on the 10-year note dropped to 2.07 percent. Stocks rose, with the S&P 500 up 1.2 percent. The retail sector, battered by the rise of e-commerce, lost jobs for the fourth month in a row. Employment in the sector has dropped by 50,000 since January.
After government reports showed substantial employment gains in March and April and a growth rate of more than 3 percent in the first quarter, it appeared that fears of a recession were overdone. Now those concerns are back. On Friday, the latest numbers prompted economists on Wall Street to predict the Fed would cut interest rates as soon as next month. Jerome H. Powell, the central bank’s chairman, hinted on Tuesday that policymakers were prepared to cut rates if the trade war hurt the economy.
Bond yields recently dropped to their lowest level since 2017. This isn’t what is supposed to happen when the economy is strong. During good times, the interest rate on government bonds usually rises, as investors plow their money into riskier assets. Plunging bond yields are a sign that investors are worried that growth is about to falter. Until relatively recently, the expectation was that the Fed would continue raising its benchmark interest rate, something it started doing in December 2015. The Fed changed course in January, when Mr. Powell suggested that very modest inflation and weakness in Europe and China warranted a neutral stance.
Crude oil prices, which typically rise when traders expect the economy to charge ahead, are down about 20 percent since late April. Michael Gapen, chief United States economist at Barclays, predicted the Fed’s next move would be anything but neutral. On Friday, he estimated that the central bank would cut rates by half a percentage point in July, followed by a quarter-point reduction in September.
The current economic recovery has defied recession predictions several times. This month, the current expansion tied a record for longevity with the recovery of the 1990s. Investors, too, are increasingly convinced that the central bank will slash rates. The futures market, where traders can bet on the direction of Fed policy, indicated on Friday that investors believe there is a more than 80 percent chance of the Fed easing monetary policy in July, compared with a 17 percent probability just a month ago.
Nevertheless, Carl Tannenbaum, chief economist at Northern Trust, puts the risk of a recession higher than at any times since the financial crisis of 2008. “They say that policy errors, not old age, end expansions, and the steps taken on the trade front in the last five weeks fall under that,” he said. Expecting a rate cut, the financial markets bid up the price of stocks and bonds on Friday, with the S&P 500 closing up about 1 percent.
At Glassdoor, the jobs site, new listings for positions at small employers are outpacing activity at the biggest companies. Hiring at businesses with 50 or fewer employees is up 22 percent from a year ago, while job postings are down 3 percent at companies with more than 5,000 employees. While large companies seem more hesitant, small businesses are showing more optimism, said Andrew Chamberlain, chief economist at Glassdoor, the jobs site. Hiring at businesses with 50 or fewer employees is up 22 percent from a year ago, while job postings are down 3 percent at companies with more than 5,000 employees, according to his company’s data.
“If you are looking for sectors that would slow hiring because of uncertainty today, it would be large employers,” said Andrew Chamberlain, chief economist at Glassdoor. “Small companies are doing business locally.” “If you are looking for sectors that would slow hiring because of uncertainty today, it would be large employers,” Mr. Chamberlain said. “Small companies are doing business locally.”
The Chicago-based technology and logistics company ShipBob isn’t tiny — it has about 500 employees — but it has been hiring at a furious pace. The company helps online retailers offer two-day shipping — vital if they want to keep up with Amazon and other large retailers. It also offers systems that let clients track inventories and route orders to the nearest warehouses. Matt Phillips, Peter Eavis and Ben Casselman contributed reporting.
Not that it’s easy to find new workers. “It’s a very competitive market,” said Lauren Alford, director of recruiting and onboarding at ShipBob. To attract white-collar employees, ShipBob offers an unusual perk — unlimited time off.
“People don’t abuse it,” said Kristina Lopienski, content marketing manager at ShipBob. “We are offering that flexibility if something comes up personally. We’re not watching you clock in and clock out.”
In addition to hiring salaried employees at its Chicago headquarters, ShipBob has been recruiting hourly workers at five fulfillment centers. In May, the company hired more than two dozen at headquarters and over 50 at those warehouses.
That’s good news as new college graduates enter the job market, said Tom Gimbel, chief executive of LaSalle Network, a Chicago recruiting and staffing company.
Jobs that used to offer starting salaries of $30,000 to $40,000 are paying $40,000 to $50,000, Mr. Gimbel said. “I’m talking about liberal arts graduates, not engineering or accounting majors,” he said. Many entry-level positions in fields like sales, marketing and human resources routinely pay $40,000 to $45,000.
“My clients are investing,” Mr. Gimbel said. “They’re not afraid to pull the trigger.”
Nor are clients jittery about the recent volatility on Wall Street. “It mirrors the political landscape,” he added. “Just the way Trump creates chaos, people don’t see the chaotic market as an indicator.”
Matt Phillips and Ben Casselman contributed reporting.