A Spring Swoon, or Something More Sinister?

Tomorrow morning at 8:30 a.m. ET (July 8, 2016), the U.S. Bureau of Labor Statistics (BLS) will release its June 2016 Employment Situation Report. The consensus of market analysts is expecting a 180,000 increase in jobs, a +2.7% year-over-year gain in wages, and a 4.8% unemployment rate. The report—the most closely watched economic report of the month—is especially critical this month, given the weakness seen in the labor market in both the April and May employment reports.

Through March 2016, the U.S. economy had routinely created between 175,000 and 200,000 jobs per month for six years. Yes, some months in those six years were clunkers:

  • December 2010: 88,000
  • January 2011: 42,000
  • April 2012: 75,000
  • December 2013: 45,000

More recently, the 84,000 jobs created in April 2015 was a particularly weak month, but as was the case with the other bouts of job creation weakness since 2010, job growth resumed its steady 200,000 per month pace in the summer of 2015 and never looked back. Until earlier this year, that is.

After this recent very mild and dry winter across the U.S. that saw the economy create a well-above-trend 240,000 jobs per month in the six months ending in March 2016, job growth in April was just 123,000, and only 38,000 in May. That put average job growth in April and May 2016 at just 80,000 per month, well below the average since 2010. Markets are asking: Is this slowdown in job creation a spring swoon, or the start of a slide into a recession?

We have long expected job growth to slow from the 200,000 per month pace seen in the last six years, to the 125,000 to 150,000 range by the end of 2016. The Federal Reserve (Fed) expects a similar slowdown, and has said that job growth as low as 120,000 per month is enough to tighten the labor market, push up wages, and ultimately inflation. But we (and many others) didn’t expect that job creation would slow so abruptly—over a two-month span—and so dramatically (from 200,000 to 80,000). So, what happened?

It is likely that some of the slowdown in April and May 2016 was “payback” for the well-above-trend gains of 240,000 per month in fall 2015 and winter 2016. A later than usual spring break likely shifted some hiring patterns this year, and a strike at a large cellular telephone provider held the job count down by 35,000 in May. In addition, almost all the other data in hand on the U.S. labor market for April, May, and June 2016 show a continuation of the strong growth seen since 2010.

Markets expect a snapback in job creation in the June report, with the consensus expecting a 180,000 gain. Assuming no revisions to April or May (a simplifying assumption, as revisions are typical), that would leave average job growth in the second quarter at a still tepid 113,000, but the six-month average would be a solid 150,000 per month. That type of reading would help to calm fears of a collapse in the economy and labor market. A very strong reading on jobs (over 225,000) in June (with upward revisions to prior months) might worry markets that the Fed will need to raise rates a few times this year. On the other hand, a weak number (below 100,000) may further stoke fears of an impending recession in the U.S. Thus, as is often the case, markets are looking for a “goldilocks” reading on the labor market tomorrow morning.

IMPORTANT DISCLOSURES

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

The monthly jobs report (known as the employment situation report) is a set of labor market indicators based on two separate surveys distributed in one monthly report by the U.S. Bureau of Labor Statistics (BLS). The report includes the unemployment rate, non-farm payroll employment, the average number of hours per week worked in the non-farm sector, and the average basic hourly rate for major industries.

This research material has been prepared by LPL Financial LLC.

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