May Jobs Report Proffers a Needed Reality Check

The latest employment numbers, released on Friday by the Bureau of Labor Statistics, reinforce a key point I made in my assessment of April’s data (see the April jobs analysis) when it was released last month: while many market participants have taken the slow improvement in labor market outcomes as a precursor of an absorption rebound, confidence intervals on fundamentals forecasts should remain wider than prevailing investment trends suggest. In leading markets around the country, investment and credit inflows anticipate that employment momentum will definitely accelerate even as an analysis of the underlying economic data calls for a more reserved assessment.

Apart from the aggregate statistic’s falling short of market expectations, there were few major surprises in the report of May employment. Federal and state government payrolls were largely stable while local governments gave up 28,000 jobs. The private sector added 83,000 jobs, the smallest number in almost a year, since June 2010. As for the ranks of the unemployed, too large a share – 45.1 percent – has been out of work for six months or more.  At 4.5 percent, the unemployment rate is holding at relatively low levels for persons with college degrees. For low-skill labor, such as those persons with less than a high school diploma, the unemployment rate is 14.7 percent.

While hiring was flat in most sectors, gains continued apace in professional and businesses services – principally in accounting services – and education and health services, a stalwart of the employment recovery. Retail trade and leisure and hospitality payrolls fell. Financial activities employment, a key component of demand for prime office space, increased by just 3,000 jobs. At least at the national level, financial activities have lagged broader employment trends, falling by 13,000 jobs over the last year, mostly in insurance-related activities.

Financial Market Implications

Apart from unsettling recent suggestions of a monotonically increasing recovery, the new jobs report also has implications for financial conditions. Barring a sharp acceleration in activity, continued slack in the labor market and in the economy’s productive capacity will continue to support accommodative monetary policy. Based on current data, we should not expect an increase in the Fed Funds rate until after the September FOMC meeting.

Particulary in light of Europe's soverign debt woes, the language coming out of the June 21 and 22 FOMC meeting should characterize recent economic data as mixed while restating the “extended period” commitment to the current policy bias. While an extension of quantitative easing is altogether unlikely, upward pressure on long-dated treasuries will be measured in the near-term.  Of critical import for investors, the medium- and long-term outlook for rates remains weighted towards significantly higher borrowing costs. For the time being, however, a confluence of factors has pushed the ten-year rate to 3.0 percent, down from a local peak of 3.6 percent in April.