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A Worrying Sign on Jobs

In a year when economic growth has seemed tenuous, the resilient labor market had been providing welcome reassurance.

But the report released by the Bureau of Labor Statistics this morning shows that the U.S. economy added only 38,000 jobs in May, far below expectations. The headline number was reduced by 35,100 due to striking workers at Verizon Communications. Without the strike, payrolls would have increased by 73,000. Either way, the jobs growth in May is much slower than it was earlier in the year (See Chart 1).

Chart 1:

Yet another worrying sign is that the weakness in job creation appears to be spreading across industries (see chart 2).

Chart 2:

Earlier this year, only mining and logging, durable goods manufacturing, and transportation were posting job losses. This was easily explained by shrinking domestic oil production as a result of a sharp decline in crude oil prices. Employment in oil extraction (part of the mining and logging sector) was shrinking, as was production of heavy equipment used in the oil sector, leading to job losses in durable goods manufacturing. Transportation of domestic crude oil (much of which is done by rail) was falling as well.  There was a possibility that the weakness and the job losses would be contained in the industries affected by crude oil production.

But in April and May, it seems that the job losses spread to other industries. Now, in addition to mining, durable goods manufacturing and transportation, job losses have appeared in construction, wholesale trade, utilities, retail sales, and information services (although the last one is mostly due to a strike). Other industries continue to add jobs, but at a much slower pace than before. This is a worrying sign.

And yet, the unemployment rate still fell in May to 4.7 percent, from 5 percent in April. How can this be? The answer is not encouraging – the drop in the unemployment rate is mostly driven by people dropping out of the labor force. In May, 458,000 people left the labor force, after 362,000 did so in April. Such a substantial decrease in the labor force for two months is a row is unusual (see chart 3) and is yet another worrying sign.

Chart 3:

To sum up, this was a very disappointing employment report with several worrying signs for the economy. It makes it nearly certain that the Federal Reserve will not raise interest rates when it meets in June. We will be watching other data carefully to see if the worrying signs seen here are confirmed by other information.

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