We once again rely on the very excellent Online WSJ for
a quick review of the Dismal Scientists re: the "puzzling results" of NFP. The Under
remains the winning bet!
Employers added just 78,000 jobs in May, well below the expectations of forecasters and behind the much more robust 274,000 jobs created in April. The unemployment rate fell one tenth of a percentage point to 5.1%. Is the weak payrolls report a temporary blip in an otherwise strong economic cycle, or a portent of a weaker growth in the months to come? Will the Federal Reserve now suspend its campaign of interest rate increases, or keep tightening the monetary spigot?
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Economists weigh in:
Today’s report clearly feeds market belief that the FOMC is almost done tightening, and indeed will stir debate about whether a 25bp tightening move will occur on June 30 (this was still fully discounted as of yesterday). We would advise taking a step back and looking at the forest instead of the trees. A saw-tooth pattern for payrolls in the past four months creates difficulties in ascertaining a trend. While the latest print was a bad one, the FOMC rarely bases decisions on a single data point. We think that a 25bp tightening move is still likely on June 30, with future moves subject to what the economic data dictate.
— Joshua Shapiro, Maria Fiorini Ramirez Inc.
The overall softness in the payroll data coupled with the modest 0.2% advance in hourly earnings weaken the case that the job market is in danger of generating wage-driven inflation pressures. That won’t be enough to dissuade the FOMC of the need to continue removing its accommodation but developments in the job market in the next two or three months will probably determine when or whether the Fed pauses in the process.
— David H. Resler and Gerald Zukowski, Nomura Securities International
While the bond market focuses on the lower than expected increase in payrolls, the Fed will likely take a broader view of the report. We would highlight the robust increase in hours worked for the quarter to date, rising labor force participation combined with the declining unemployment rate (showing both optimism over the employment outlook and a tightening of the labor market), and robust job gains in the household survey.
— John Ryding, Conrad DeQuadros, and Elena Volovelsky, of Bear Stearns
Weather conditions may have restrained the job tally even more than we had anticipated. In particular, the drop in the leisure category appears somewhat suspicious. Some major regions of the country experienced their coldest May in over 100 years. This is one reason we expect to see a rebound in job growth during June, which would represent a continuation of the recent see-saw pattern.
— David Greenlaw and Ted Wieseman, Morgan Stanley
These puzzling results — good GDP growth, erratic employment gains and falling inflation-adjusted wages — reflect two conflicting trends in the national economy. The housing boom and huge trade deficit are pulling the U.S. economy and jobs market in opposite directions. Rising home prices continue to power the economic recovery, as consumers rely on paper wealth and borrow ever larger sums to finance everyday spending. … At the same time, the huge trade deficit, which exceeds the federal budget deficit by about $275 billion, is destroying jobs in manufacturing and other industries that pay above average wages.
— Peter Morici, Robert H. Smith School of Business, University of Maryland
Most measures of the labor market indicate that the degree of slack is slowly disappearing. The official unemployment rate is still the most positive. Several other measures indicate that there are substantially more available labor resources, but they too are also slowly improving. As labor market slack disappears, the FOMC will continue to boost short-term interest rates.
— Steven Wood, Insight Economics
React: ‘Puzzling Results’
June 3, 2005 10:16 a.m.