May Employment Report: Underwhelming, But Not Ominous

With the emphasis traditionally placed on the headline nonfarm payroll number, today's employment report can only be described as disappointing. The census-bloated payroll increase of 431,000 in May included only a modest 41,000 gain in private payrolls compared to gains of 218,000 and 158,000 in April and March respectively. On such grounds, the Treasury market's initial reaction to the report is fully understandable, and, on some level, perhaps justified.

However, a more dispassionate look at the specifics of the data still points to an ongoing underlying improvement in labor market conditions, albeit at a pace that, overall, still falls short of expectations for this phase of the economic recovery.

Some of the silver lining, that merits attention in the May report includes:

a) A 29,000 increase in manufacturing jobs, which brings the cumulative gain in that category in the last 5 months to 126,000. This is fully consistent with the strong showing of the employment component in the ISM recently, which confirms that the sector is moving ahead at a solid clip.

b) The gain in the workweek for all employees continues to rise, edging up again to 34.2 hours, a classic precursor to more hiring ahead. The series has been showing a steady uptrend since late last year.


Source: Bureau of Labor Statistics


c) In the household survey, the number of persons employed part-time for economic reasons (the so-called involuntary workers) fell by 343,000 last month to 8.8 million. A downtrend in this series should be viewed as a direct reflection of an improving labor market landscape, as employers are increasingly more willing to employ full-time workers in the midst of a turnaround in the overall economic climate.


The drop in the unemployment rate to 9.7% last month from 9.9 in April, is of little material importance, as it essentially returns the series to its Q4 2009 level, and it was mostly the result of a somewhat counter-intuitive fall in the number of unemployed re-entrants to the labor market by 286,000 in May.


Without downplaying the disappointingly slow pace of net new hiring in the private sector, it appears that, apart from the notoriously noisy nonfarm payroll number itself, there is little reason to conclude from today's report that the recovery is in danger of stalling. Such conclusions would represent an overly hasty take on a set of data that tend to be more nuanced than the disproportionate degree of attention paid to a single number (that also enjoys a well-deserved reputation for being the subject of, at times, extreme revisions in subsequent months).

Based on the broader set of economic indicators released in recent weeks, there is little reason to scale down appreciably our earlier "penciled-in" forecast that we are likely to see average monthly private payroll gains in the vicinity of 200,000 in the third quarter.

Anthony Karydakis