As the U.S. economy slows, we would expect to see evidence of this in unemployment numbers, which is exactly what we’re seeing.
In fact, new evidence proves the economy is not on the mend, as hoped.
In May, the economy added just 38,000 jobs – the weakest showing in six years and far short of expectations for an addition of 162,000 jobs.
Worse, April 2016 numbers were revised to 123,000 from 160,000, as well. March numbers were downgraded from 208,000 to 186,000.
At the same time, the unemployment rate fell to 4.7% from 5%, according to the U.S. Labor Department. But it fell because of the frightening reality that more than a half million Americans stopped looking for work and were no longer officially counted as unemployed.
As a result of Americans leaving the workforce, the labor participation rate dropped another 0.2% in May to 62.6%, wiping out any previous improvements for the year.
The number of Americans no longer in the labor force jumped to 94.7 million, surging by 664,000 in one month.
Meanwhile, there are still weak signs of impactful wage growth. Average hourly earnings increased just 0.2% over the last month, leaving the year-over-year number at 2.5%. Analysts believe this needs to rise to between 3% and 3.5% in order to lift inflation to the Federal Reserve’s healthy target rate of 2%.
So what does this mean to the Federal Reserve?
According to the Fed’s previous notes, a rate hike was contingent on economic growth picking up in the second quarter; labor market conditions continuing to improve; and inflation making progress toward a 2% objective.
While we’ve seen some progress following reports of 0.8% GDP growth, U.S. jobs growth weakness put a June 2016 hike in serious doubt. In fact, Fed Fund futures point to only a 6% chance of a hike for June; 35% for July; 51% for September; and 53% for November.
Consumer spending may have ticked higher, as Americans spent more money on autos and other durable goods. Even a revived housing market has shown signs of acceleration.
But given recent jobs growth, we’re not likely to see any rate hikes in 2016.
Given the latest data, and concerns related to the June 23, 2016 UK vote on whether it will remain a part of the European Union are likely to give the Federal Reserve reason to pause plans to hike interest rates.
We continue to believe the Federal Reserve will not hike rates this year.
However, we must remember that despite the bleak economic news, the U.S. economy will always be quite resilient.