Jobless numbers came in quite light this morning at 112,000 — far below consensus estimates of 250,000. May Payrolls data was revised downwards, to +235k from a previous +248k.
This “Good News/Bad News” situation has several repercussions:
The good news is that the Fed policy of gradually removing their accommodation at the “measured” rate of ¼ point per meeting remains on track. That low cost of capital will continue stimulating the economy, albeit at a slower pace, than it has.
The bad news is that this data point, coming on top of weakening Durable Goods spending, downwardly revised Q1 GDP, slowing auto sales, and decreasing mortgage applications raise questions about the pace and even the sustainability of the expansion.
Note that the economy needs to add about 150,000 jobs per month just to keep up with the population growth of the labor pool. Thus, this recent data point means that the percentage of labor being utilized actually went down last month.
The impact of this data point puts us back on Payroll watch for at least another month. Is this way below consensus number an aberration of the prior 3 strong months, or are we seeing a reversal of the prior trend? One data point does not make a trend, but as it may signal a potential reversal, it is worth watching closely.
Lastly, consider the ongoing presidential election contest. Regardless of your personal preference, the markets have shown they have a clear preference for the incumbent over a challenger. We saw this during the March drop, as the incumbent’s approval numbers slid to their lows.
This data point places a yet another hurdle in front of the President’s re-election campaign. As we mentioned yesterday, the markets may actually — for the first time in recent memory — be paying attention to the Democratic Convention later this month. They will either try to become comfortable with the challenger as a likely successor, or in the event of a major gaffe, become less concerned about his potential for victory.
Stay tuned . . .