DAVID ROSENBERG: I don't want to alarm anyone but ...
Screenshot via Bloomberg TVDavid Rosenberg.
Before getting into the details of the jobs report, let me just quickly state the broad conclusions up front.
My forecast is that the long lineup of Fed officials who were so vocal about raising rates this summer are going to be too busy at summer school (as they go back to the drawing board) to tighten monetary policy.
Hopefully they have been silenced for good and learned a valuable lesson that they really should cast their vote at the FOMC meeting rather than in front of the TV cameras.
As for the markets, the data imply a reversal in investor-based odds of a rate hike, which had moved to a better than 50/50 bet for late July, and that in turn is bearish for the U.S. dollar, but bullish for Treasurys, curve-steepening trades, gold, emerging markets and rate-sensitive stocks like utilities and telecom services.
Defense sectors like consumer staples should benefit, but the banks that had been hoping for the Fed to provide some net interest margin expansion are certainly not going to be celebrating today’s data.
We had been saying for some time that if there was something in recession in the U.S. it was productivity and that a huge gap had opened up over the past six months between weak business output growth and the pace of job creation.
Well, now we know how that gap is being resolved — with the latter playing catch-down to the former.
As everyone is left wondering “what happened?” here is what happened.
Productivity declined at a 1.7% annual rate in Q4 of last year and followed that up with a 1.0% drop in Q1. On average, labor input expanded at nearly a 2½% annual rate and nonfarm business output growth barely averaged 1%.
So do the math.
From last October to this past March, we had an unusual situation where aggregate hours worked outpaced production by a ratio of two-and-a-half to one.
Not sustainable.
The mean reversion means that it is pay-the-piper time in terms of what this means for the labor market.
Nonfarm payrolls rose a meager 38,000 in May and even accounting for the striking Verizon workers, the headline still would have been less than half the consensus estimate of +160,000.
Shannon Stapleton/ReutersPeople demonstrate outside a Verizon wireless store during a strike in New York.
This is the biggest “miss” by the economics community since December 2013, and the worst headline since September 2010 when the Fed was more preoccupied with its next round of quantitative easing than with raising the funds rate.
Not just that, but there were downward revisions to the prior two months totaling 59,000 — something we have not seen since June of last year.
Look at the pattern; +233,000 in February, +186,000 in March, +123,000 in April and +38,000 in May. Detect a pattern here (he asks wryly)?
You can see why I was gagging when I heard some of the pundits on “bubblevision” tell the anchors this morning that the Fed will look through one number. Dude — this isn’t one number. It is a pattern of softness that has been in effect for the past four months … and counting.
In terms of sectors, two developments really stood out and neither particularly constructive.
First, goods-producing employment declined 36,000, which was the steepest falloff since February 2010. But this is not just one data-point but a visible weakening trend — this critical cyclically sensitive segment of the economy has contracted now for four months in a row and the cumulative damage is 77,000 jobs or a -1.2% annual rate.
I don’t want to alarm anyone but the facts are the facts, and the fact here is simply that this is precisely the sort of rundown we saw in November 1969, May 1974, December 1979, October 1989, November 2000 and May 2007.
Each one of these periods presaged a recession just a few months later — the average being five months.
There was just one time, in the 1985/86 oil price collapse, that we had such a huge decline in goods-producing employment without a recession lurking around the corner — but the Fed was easing then and fiscal policy was a lot more accommodative than is the case today.
Not even the job slippage in goods-producing sectors during the 1995 soft landing and the 1998 Asian crisis were as severe as what we have had on our hands from February to May.
For such a long time, the service sector was hanging in but services ultimately service the part of the economy that actually makes things.
Private service sector job gains have throttled back big-time — from +222,000 in February to +167,000 in March to 130,000 in April to +25,000 in May (ratified by the non-manufacturing ISM as the jobs index sagged to 49.7 in May from 53 in April — tied for the second weakest reading of the past five years).
Once again, a discernible pattern here, but it is where the slowdown is taking place that is most disturbing.
More than one-third of the weakening we saw in the private services sector came in temp-agency employment where employment shrunk 21,000 in May, down now in four of the past five months and by a cumulative 64,000, which is a losing streak we have not seen since August 2009.
In fact, this type of weakness over such a stretch, again not to sound like an alarmist, occurred just prior to economic recessions in the past, without exception and with no “head fakes”.
Yes, it typically is not good news when the headhunters are the ones to start chopping off heads — this is a leading indicator. So I may not want to sound alarmist, but the answer is yes … I am worried.
In fact, the weakness in employment has broadened out rather dramatically — this is not just a one or two sector phenomenon. This is not just about factories cutting back, shale weakness affecting mining or constraints within the reregulated financial sector.
The private sector job diffusion index collapsed to 51.3% from 53.8% in April and 56.3% in March (the nearby peak of 71.2% set back in November 2014 now seems like a distant memory) and has not been this low since February 2010 when the labor market was still in recession even if the overall economy had already emerged into positive growth terrain.
As an aside, as if to make a mockery of yesterday’s ISM manufacturing index pickup, the factory diffusion index retreated to 43.7% from 45.6%.
The unemployment rate fell to 4.7% from 5.0% in each of the prior two months, the lowest since November 2007, but did so for the wrong reason as household employment barely rose — up 26,000 after a 316,000 plunge in April — and the labor force shrank 458,000 (on top of a 362,000 decline in April so we are back into a phase where people are disengaging from the economy).
Without this impact, which pulled the participation rate down to a six-month low of 62.6% from 62.8% in April and 63.0% in March, the jobless rate actually would have just stayed at 5.0%.
All anyone needs to know in terms of what slack there is left in the jobs market, the broad U-6 unemployment rate was stuck at 9.7%.
There are currently 7.4 million people officially unemployed but when you tack on all the idle resources in the labor market, all the underemployment in other words, that number is much closer to 20 million. And that is why wage growth was so modest, coming in at +0.2% MoM and +2.5% YoY, which is firmly in the range of the past several years and far away from the 3½% to 4% band that Janet Yellen told us two years ago would be consistent with the Fed’s inflation objective.
Meanwhile, the workweek was flat at 34.4 hours for the third month in a row and this means that total wage-based personal incomes edged up 0.2% MoM in nominal terms but that is actually stagnant in real terms.
The bottom line is that no matter how shockingly weak the headline numbers were, the details were even worse.
Full-time employment declined 59,000 on top of a 316,000 plunge in April. Those working part-time for economic reasons — actually preferring full-time employment but no such luck — jumped 468,000 in the sharpest increase for any month since September 2012 (when the Fed embarked on QE3).
Keep in mind that this metric is a Yellen favorite.
I should add that the household survey, when put on a comparable footing to the Establishment (Payroll) Survey — the ‘population and payroll concept adjusted measure’ — slid 105,000 after a 293,000 falloff the month before.
The “quit rate”, another Yellen favorite, dipped to 10.7% from 10.8% as well and confirmed the less bullish job confidence tone that was contained in the just-released Conference Board consumer confidence survey.
Were there any positives? A few.
The median duration of unemployment did dip to 10.7 weeks from 11.4 weeks — the low-water mark of the year.
The share of unemployment that is long-term in nature fell to 25.1% from 25.7%.
Employment in the 25-34 year age cohort rebounded nicely — by 128,000 and so this can be construed as constructive for the homebuilding industry.
That is pretty well about it for any whiff of good news and comes under the label of look hard enough, and you’ll always find something nice to say. The difference with this report is that it took almost two hours to sift through the report to find anything positive.
When we try and recreate the Yellen Dashboard, which is the most holistic approach towards assessing the U.S. labor market, it deteriorated again May and this follows three prior months of negative readings.
We were always skeptical over all this rate-hike chatter of late, which seems to have just come out of nowhere, but for the Fed to tighten policy in the face of this extremely sluggish job market backdrop would be more than just a touch bizarre.
Then again, Fed officials have also told us that they are data-dependent and let’s face it … there is no smoking gun in the employment data, that is for sure, and there are no data points as important as the labor market.
This is a game-changer.
David Rosenberg is chief economist and strategist at Gluskin Sheff, and was previously the chief North America economist at Merrill Lynch.
David Rosenberg is chief economist and strategist at Gluskin Sheff, and was previously the chief North America economist at Merrill Lynch.
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