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US job growth slowest since 2010
June 3, 2016 1:47 pm Sam Fleming in Washington and Adam Samson in New York
Hiring by US employers slowed last month to the weakest pace since 2010, clouding the economic picture and dealing a blow to the prospects for a Federal Reserve rate increase this month.
Non-farm payrolls rose by a seasonally adjusted 38,000 in May, below a revised 123,000 figure for April and well below expectations for growth of about 160,000. Employers took on 59,000 fewer workers in March and April than previously reported.
The unemployment rate slid to 4.7 per cent from 5 per cent but the declines were driven by people quitting the labour force, rather than buoyant hiring. In a worrying signal, the number of people working part-time because they could not find a full-time post rose by 468,000.
Stocks sold off and the dollar fell on the report, which also sent 10-year bond yields sliding from 1.7938 per cent to 1.728 per cent. The DXY dollar index fell 0.8 per cent.
The latest payrolls numbers were affected by a strike by 35,000 Verizon Communications workers that began in late April and stretched through May. But even excluding that effect, the jobs report was poor and contrasted sharply with the robust gains that have been seen for much of the decade.
“This is a smack in the face for the US economy,” said Diane Swonk of DS Economics. “They [the Fed] need to see a much better June number to keep July on the table . . . When you are losing momentum going into the meeting, that is not when you raise rates.”
The strength of the US’s labour market recovery has sat at the heart of Fed chair Janet Yellen’s case for higher interest rates, and a single month’s number will not force the central bank to completely ditch its assessment of the economy.
The central bank’s anecdotal Beige Book report, released on Wednesday, indicated that “tight labour markets were widely noted” in most of the Fed’s dozen districts around the country. Friday’s data from the Bureau of Labor Statistics showed that average hourly earnings grew 2.5 per cent compared with the previous year, marking a bright spot.
But the jobs data make a Fed move on rates this month highly unlikely — and the odds were already very low given market risks surrounding Britain’s referendum on its EU membership. The implied probability of a June rate rise slumped in futures markets following the numbers from 5.6 per cent to 4 per cent, according to CME Group.
Traders now also see a July move as less probable, given that the downward revisions to March and April numbers suggest a broader slowing in hiring. During the past three months, job gains have averaged just 116,000 per month, compared with an average of 229,000 last year.
However, the Fed will have two months’ worth of fresh jobs data when it meets in July, meaning the picture could have changed by then. The question they will need to answer is whether hiring has been gently slowing as the economy approaches full employment, or whether companies are cutting back recruitment in the face of weak demand.
Worryingly, the pace of growth in the vast US services sector dropped last month to the lowest level since February 2014, adding to wider concerns about the health of the recovery.
The month of May saw strong gains in healthcare employment, but a host of other major sectors experienced declines, including manufacturing, where 10,000 jobs were shed; construction, where there were reductions of 15,000; and mining, with declines of 11,000. Retail jobs growth was a marginal 11,000.
“Given the drop in corporate profits and investment in recent quarters, it was surprising that job growth held up so well until now,” said Gad Levanon, chief economist for North America at the Conference Board. “We expected job growth to slow, but not that much. This weak payroll report may well deter the Fed from raising rates this summer.”
The data made an immediate impression on the presidential campaign, as Donald Trump, the presumptive Republican nominee, called the report a “bombshell” and a “terrible” number. Jason Furman, the chairman of the president’s Council of Economic Advisers said the hiring data were “disappointing” but pointed out that the economy has added 14.5 million jobs since 2010.
The safest European government debt plummeted to the lowest levels this year after the release.
German Bund yields were driven down to 0.073 per cent, while UK gilts plunged to their lowest in three months, falling 4 basis points on Friday (0.04 percentage points) to 1.298 per cent.
The data represent the last major reading on the strength of the labour market before the June meeting.
Top Fed officials have in recent weeks cited strength in the labour market as a key reason that the US economy is probably strong enough to withstand a gradual increase in interest rates beginning this summer.
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