Underwhelming Jobs Report May Put Rate Rise On Hold

The US economy only added 38,000 jobs in the month of May, badly below the consensus forecast of around 165,000 jobs.  Even accounting for the 35,000 Verizon workers on strike in May (whose numbers will be added back into the June report), this was a very weak number. In addition, revisions to the jobs numbers announced in March and April lowered the number of jobs created in those two months by nearly 60,000. The headline unemployment rate dropped to 4.7% but that number is dependent on the number of people who have jobs or are actively looking for work.  The good news was that hourly earnings rose again, up 5 cents, after a 9 cent gain in April.

Hopefully, this pretty weak report will force the Federal Reserve to reconsider its rather clear intentions to raise interest rates when they meet later this month or in July.  There is no sign that inflation is rising at a pace that the Fed could not handle – in fact it has still not reached the 2% target that the Fed has set. So it is hard to figure out the rationale behind the Fed’s desire to raise rates.  I have speculated that it has more to do with giving them room to cut rates later if the economy contracts. But raising rates too early and too quickly could make that a self-fulfilling prophecy.  And there are a number of Fed members who clearly seem to want to return to “normalcy” and reduce the Fed’s balance sheet as soon as possible, apparently for no good reason other than that’s the way it should be. One final consideration the Fed may have is the upcoming November election – they are usually loathe to make a lot of moves immediately before an election for fear of being labeled political. That fear could be pushing some members to want to act now, thinking it will be more difficult later in the year.

As has been the case for years now, the downside risks to raising rates far outweigh the risks of an overheated economy and runaway inflation. As was the case with the French after World War I, our economic generals seem to keep on wanting to fight the 1970s all over again. But, as the French learned when the Maginot Line fell, times change.  Wages are finally going up after stagnating for years and years and inflation is firmly under control and under the already low 2% target.  There’s no reason to raise rates and risk an economic slump right now.