Another month, another jobs report, and another mixture of good and bad news.
The good news was that unemployment fell to 4.3% in May, down half a percentage point since January and its lowest since 2001. Job growth was strong in the perennial winners, health care and professional and business services. Wages also grew at an annualized 2.5%, not great but still on target.
And that was it.
Employment growth of only 138,000 was well under economists’ consensus estimates. Job growth in March and April turned out to be 66,000 less than was previously reported. And job growth has clearly decelerated, from an average 181,000 over the past 12 months to only 121,000 over the last three, about a one-third decline.
This chart from Econoday on Barrons.com shows that job growth likely peaked in February 2015 and has been slowing ever since. Meanwhile, the workforce participation rate, the Achilles’ heel of this recovery, slipped 0.2% to 62.7% in May after having stabilized a bit recently.
And the Dow Jones Industrial Average, Standard & Poor’s 500 index and Nasdaq Composite index all hit new all-time highs in late afternoon trading.
What does all this tell us?
First of all, the ultralow unemployment rate and the half-decent wage growth should be enough to overcome the slowing employment growth for the Federal Open Market Committee (FOMC) to raise the federal funds rate again by a quarter-point at its next meeting on June 13th-14th.
Ideally, the FOMC would like things to be firing on all cylinders before it hikes rates, but I think Fed Chair Janet Yellen and her close colleagues realize they’re a bit behind the curve and may need to hike rates a bit to give them more firepower when the next recession hits.
I think the deceleration of job growth along with such indicators as U.S. auto sales, which fell for the fifth consecutive month in May and are on track for their first annual decline since 2009, show we may have passed peak growth in this economic cycle. Another reason job growth is slowing: we may have reached what economists call “full employment.”
“The economy is already at full employment and is sure to blow past full employment in coming months, Moody’s economist Mark Zandi told Politico’s Ben White. “Businesses’ number-one problem will soon be a lack of qualified labor.”
And indeed there are lots of anecdotal reports that employers are having trouble finding people with the right skills to fill job openings.
Consumer and business confidence remain strong and housing sales are holding up well, but I think we’ve probably seen the peak of this economic recovery. That means the stock market may also top out in the months ahead.