What Did the May Jobs Report Show Us? – Weekly Update for June 6, 2016

Adobe Spark (7)Stocks closed the holiday-shortened week mixed, with some sectors losing ground while others gained after a disappointing May jobs report signaled that the economy may not be strong enough for the Federal Reserve to raise rates this month. For the week, the S&P 500 ended flat, the Dow lost 0.37%, the NASDAQ increased 0.18%, and the MSCI EAFE added 0.13%.

On Friday, we got a look at how the labor market did in May. Analysts looked to the report to see whether the labor market would give the Fed the ammunition it needed to move at the June meeting. Here are a few things we took away:

Job growth disappoints…but it has happened before

The economy created just 38,000 new jobs last month, the worst showing since September 2010. The number of new jobs sharply missed expectations, which called for around 160,000 new jobs. However, seasonal factors, like a massive Verizon worker strike, which took 34,000 workers out of the count, were at play and may have affected hiring numbers.

The labor market has suffered temporary setbacks before. For example, in December 2013, the economy added a paltry 45,000 jobs; four months later, the economy gained 310,000 jobs. In March 2015, the labor market added just 84,000 jobs; in July, 277,000 new jobs were created.

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Labor market trends may slow job creation

The jobs report showed that the unemployment rate fell to 4.7%, the lowest since November 2007. However, much of the decrease occurred when jobseekers dropped out of the job search. As we approach full employment (some may argue that we’re already there), the effects of having fewer jobseekers begin to be felt by employers.

Employers who are hiring may struggle to find qualified candidates due to skill mismatches, a problem that’s likely to continue to affect certain industries.

These issues affect job creation in a “mature” labor market recovery. One industry expert projects that monthly job growth will average 175,000 for the rest of 2016. In comparison, monthly job increases averaged 251,000 in 2014 and 229,000 in 2015.

Can the slower pace of hiring support the consumer spending the economy needs to grow? Perhaps, if wages continue to grow. Wages were up 2.5% in May as compared to a year ago, which is a better pace of growth than we have seen. Another measure of wage growth favored by economists, the Employment Cost Index (ECI), shows that wages were up 2.4% (year-over-year) in the first quarter. A third measure calculated by the Atlanta Fed shows a rosier 3.4% annual increase in hourly wages in April. You can bet that the Fed will be looking at all three measures when deciding if wage growth is strong enough to support consumer spending this year.

The Fed may not raise rates in June

The weak report also may have reduced the odds of a June interest hike by the Federal Reserve, though some analysts think that other positive economic indicators might give the Fed the confidence to act. Right now, the market is pretty convinced the Fed won’t raise rates in June; one measure shows that the current market probability of a June hike is just 3.8%, while the probability of a July hike is 31.3%.

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Our view

Overall, does the weak May jobs report signal weakness in the U.S. economy?

Perhaps, though it’s far to soon to sound the alarm. Since other economic indicators like Gross Domestic Product growth, housing market activity, and personal spending all point to positive growth, it’s not likely that one weak report spells disaster for the economy. Rather than fixate on a single piece of data, it’s more important to look at overall economic trends.

Looking ahead, we’re expecting investors to take stock of the dismal jobs report and perhaps hit the brakes on the three-month rally we’ve experienced. Summer tends to be a slow season for markets as many traders take time off and stocks can overreact to headlines. A small pullback in the weeks to come wouldn’t surprise us, though traders could also shrug off the report. While weak data always sidelines some investors, long-term investors should focus more on their goals and less on short-term market swings. As always, we’ll keep you updated.

 

ECONOMIC CALENDAR:

Monday: Janet Yellen Speaks 12:30 PM ET, Janet Yellen Speaks 2:00 PM ET

Tuesday: Productivity and Costs

Wednesday: JOLTS, EIA Petroleum Status Report

Thursday: Jobless Claims

Friday: Consumer Sentiment, Treasury Budget

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HEADLINES:

Motor vehicle sales slump in May. The latest data shows that fewer selling days and lower foot traffic hurt U.S. auto sales last month.

Construction spending falls in April. Spending by construction firms on residential, government, and nonresidential projects declined, surprising economists who had expected a slight overall increase.

Factory orders beat expectations. April orders for U.S. manufactured goods grew by the largest amount in six months, though much of the growth came from volatile commercial aircraft orders.

Personal spending surges in April. Spending by American consumers grew more than expected while personal income increased in line with expectations, showing that consumer spending is off to a good start in the second quarter.

April Jobs Report Shows Slower Pace of Growth – Weekly Update for May 9, 2016

Image courtesy of FreeDigitalPhotos.net/phasinphoto

Image courtesy of FreeDigitalPhotos.net/phasinphoto

Markets slumped for the third week as global concerns pressured investors again, and domestic data painted a modest picture. For the week, the S&P 500 lost 0.40%, the Dow fell 0.19%, the NASDAQ dropped 0.82%, and the MSCI EAFE fell 3.19%.

April’s job report showed investors that the labor market continues to improve, adding 160,000 jobs last month. However, the gains were far below the consensus estimate of 200,000 new jobs. Though the unemployment rate remained unchanged at 5.0%, one estimate of the underemployment rate—measuring discouraged workers and part-timers who want full-time work—fell to 9.7% from 9.8% in March. That’s good news, because it means that workers who have struggled in the recovery may finally be catching up.

However, it’s not all good news. A separate private industry report found that job cuts surged 35.0% between March and April as firms let go of workers. Over 250,000 pink slips were handed out between January and April, the largest number since early 2009. Though the beleaguered energy sector is driving layoffs, shifting consumer preferences are also causing retail and computer companies to cut jobs.

Further analysis of the job gains also showed that much of the fastest growth in hiring is coming from low-paying industries like retail and hospitality. The lack of high-paying job opportunities is reflected in wage growth numbers. Since 2005, the median weekly wage across all jobs has increased by just $176. Wage gains are even slower in low-paying industries and for workers with less education.

Economists suspect that slow wage growth is contributing to sluggish consumer spending and slower economic growth. When foreign demand drops, economic growth depends more on domestic spending. However, there are signs that growth may be picking up; in April, wages grew 2.5% from the previous year.

Will wages pick up enough this year to drive more purchases of big-ticket items? We’ll have to see.

Looking ahead, it’s unclear whether domestic economic data will drive away global woes. Realistically, we’re likely to see both soft and strong data in the weeks to come that will hopefully push stocks higher again once earnings season is over.

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: EIA Petroleum Status Report, Treasury Budget

Thursday: Jobless Claims, Import and Export Prices

Friday: Retail Sales, PPI-FD, Business Inventories, Consumer Sentiment

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HEADLINES:

Construction spending grows .03% in March. Spending on commercial and residential construction reached its highest level in eight years after a strong gain in February.

Motor vehicle sales close to record month. After a slow start to the year, April light vehicle sales are expected to grow 5.0%, setting a new monthly high and putting U.S. automakers on track to beat last year’s sales record.

China’s trade slumps. Imports and exports in the world’s second-largest economy contracted sharply in April in the latest sign that weak demand is prolonging China’s slowdown.

March factory orders increase 1.1%. Orders to U.S. manufacturers increased modestly after dropping in February. Economists hope that the dollar’s drop will help the manufacturing sector bounce back.

Remember What Happened May 6, 2010? Weekly Update – May 11, 2015

Image courtesy of FreeDigitalPhotos.net/renjith krishnan

Image courtesy of
FreeDigitalPhotos.net/renjith krishnan

In this week’s commentary, we want to draw your attention to a significant market anniversary. Five years ago, on May 6, 2010, the U.S. stock market experienced a “flash crash” when the Dow Jones Industrial Average plummeted nearly 1,000 points in minutes, erasing almost $1 trillion in market value. The Dow immediately reversed itself and regained much of the lost ground that day. The event, caused by a large institutional trading program, was the largest single day drop in market history and caused an immediate media frenzy.[1]

In the weeks after the crash, news outlets blazed with headlines like: “Mean Street: Crash — The Machines Are in Control Now” and “Was Last Week’s Market Crash a Direct Attack By Financial Terrorists?”[2] Fear mongering by talking heads led many investors to worry that they were outclassed by big traders. A London-based trader was indicted last month for contributing to the 2010 crash by placing fraudulent orders that helped spark the selloff.[3] Fortunately, the flash crash was a miniscule blip on the market radar and ended up having very little effect on most investors.

So, what have we learned in the five years since then?

Despite panics and flash crashes, financial markets are still functioning. You’ll always find someone to tell you that the sky is falling and markets won’t recover from some event. Though the past can’t predict the future, U.S. markets have survived panics, crashes, bubbles, and crises and risen again.

Today’s markets are volatile and unpredictable. Smart investors don’t worry too much about what markets are doing this week, this month, or even this year. Instead, they focus on their own financial goals and create strategies that can withstand challenging market environments.

Flash crashes (or some other minor event) could happen again. Today’s markets are flooded by orders generated by sophisticated trading programs and institutional investors. Though Congress acted swiftly to institute “circuit breakers” that pause trading in stocks that experience a violent swing, it’s possible that another confluence of events or intermarket feedback loop could cause a similar problem in the future.[4]

Since we can’t predict these “black swan” events, all we can do is build prudent strategies and carefully manage risk.

Things aren’t always as bad as the media makes them out to be. The media makes money on eyeballs and shocking headlines. It’s absolutely critical to both your portfolio and your mental health that you learn to tune out the noise and focus on fundamentals. One of the greatest advantages of working with financial professionals is that we keep an eye on economic and market events for you. We are also trained to take emotion out of the equation and make rational decisions in the face of market movements.

If you’re ever worried about where markets are going or have questions about how events affect your financial picture, please reach out to us. While we can’t predict markets, we are always available to offer reassurance and answer questions.

ECONOMIC CALENDAR:

 Monday: Factory Orders

Tuesday: JOLTS, Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report

Thursday: Jobless Claims, PPI-FD

Friday: Empire State Mfg. Survey, Industrial Production, Consumer Sentiment, Treasury International Capital

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HEADLINES:

Jobs rebounded in April. U.S. job growth surged in April, and the unemployment rate dropped to a multi-year low. Tempering the good news, the March report was revised to show that just 85,000 new jobs were created.[5]

Eurozone economy grew in first quarter. Despite worries about Europe’s weak growth prospects, experts believe that the Eurozone economy may have grown at a faster pace than the U.S. economy.[6]

Despite drop in sales, wholesalers increase inventories in March. Wholesalers, the firms that supply U.S. retailers, slightly increased their inventories in March in anticipation of Spring-led retail demand. Higher retail sales would spur restocking and boost their sales.[7]

Puerto Rico braces for austerity measures. Faced with financial shortfalls and $72 billion in public debt, the U.S. territory slashed its proposed budget and requested help in finding a solution to the fiscal crisis. If a solution is not found, the Puerto Rican government could stop debt repayments.[8]

 

Footnotes:

[1] http://money.cnn.com/2010/10/01/markets/SEC_CFTC_flash_crash/

[2] http://blogs.wsj.com/deals/2010/05/06/mean-street-crash-the-machines-are-in-control-now/, http://www.alternet.org/story/146793/was_last_week’s_market_crash_a_direct_attack_by_financial_terrorists

[3] http://www.usatoday.com/story/money/markets/2015/05/06/uk-flash-crash-trader-navinder-singh-sarao/70881770/

[4] http://money.cnn.com/2010/06/10/markets/SEC_circuit_breakers_rules/index.htm?postversion=2010061013

[5] http://www.foxbusiness.com/markets/2015/05/08/traders-cautious-ahead-april-jobs-report/

[6] http://www.cnbc.com/id/102665345

[7] http://www.foxbusiness.com/markets/2015/05/08/us-wholesale-stockpiles-up-slight-01-percent-in-march-despite-eighth-straight/

[8] http://www.foxbusiness.com/markets/2015/05/08/puerto-rico-braces-for-austere-budget-amid-warnings-financial-shortfall/