May's Dismal Unemployment Report Is Another Warning Sign For The Economy

A couple of months ago, I wrote about the warning signs for the US economy, as shrinking job growth, the collapse in the retail sector, both in sales and employment, and weak first quarter GDP could be a sign that the grindingly slow eight year expansion could be on its last legs. Those worries were somewhat abated by April's strong unemployment report, rising personal incomes, and growing consumer spending. But Friday's dismal unemployment report for May brings all those prior concerns back on table.

The headline numbers of the May report were actually misleadingly positive, showing 138,000 new jobs created and the unemployment rate again dropping to 4.3%. However, the 138,000 was well below the consensus of 185,000 and the prior two months' adjustment showed an additional loss of 66,000 jobs. Even more worrying was the fact that the reason the unemployment rate dropped was not because more workers were getting hired, but because more workers were discouraged and dropping out of the labor force entirely. Both the employment-to-population (EPOP) ratio and the Labor Force Participation rate declined. Much of this decline is due to demographic issues such as baby boomers retiring but an important component is simply people who have given up trying to find a job. Of course, those people are still unemployed but just not counted in the official statistics.

As Kevin Drum keeps pointing out, job growth peaked in 2014 and has been slowing ever since. In addition, hourly earnings have been increasing slightly faster than inflation in the past year but that rate of wage growth has actually slowed in recent months, dropping 3 cents from April, to a 4 cent increase. This is particularly disconcerting because, if we are at full employment as the Fed and others have suggested, we would expect the rate of hourly earnings to be growing, not shrinking.

This weak unemployment report is not likely to inhibit the Fed from another interest rate hike, probably later this month. That will be an additional damper on the economy as is the general dysfunction and uncertainty created by Trump and the inept Republicans in Congress. Health care is 20% of the economy and we still have no idea what will be the regulatory environment for that industry in the coming years. Businesses are also waiting to see about the GOP's tax plans, especially the repatriation of foreign profits and the corporate tax rate. But, besides a one-page outline, the administration and Congress have provided no real details, much less a bill that could be voted on.

None of this is likely to help the economy at large. And, if the economy does take a downturn, the already shaky prospects for the Republicans in 2018 will become as dismal as this May unemployment report.