Hiring was weak in May as employers added 75,000 jobs, bolstering the Federal Reserve’s case for cutting interest rates as soon as this month, a possibility that has juiced markets in recent days.
The unemployment rate was unchanged at a 50-year low of 3.6%, the Labor Department said Friday.
Economists surveyed by Bloomberg expected 178,000 job gains.
Adding to the concerns: Payroll gains for March and April combined were revised down by a total 75,000. March’s additions were revised from 189,000 to 153,000, and April’s, from 263,000 to 224,000.
The May employment report was highly anticipated because of recent speculation that the Fed could cut its benchmark rate for the first time in a decade as soon as this month, especially if the economy softens. The jobs report typically provides the best real-time gauge of the labor market and economy.
Fed policymakers have indicated they’re prepared to trim rates if necessary, noting concerns that the recent escalation of U.S. trade battles with both China and Mexico could further impede already slowing growth. A stock market that was tumbling amid the trade jitters has rallied since Fed officials have raised the possibility of rate cuts, which tend to increase consumer and business borrowing and prod investors to move money from bonds to higher-yielding stocks.
After the jobs report was released, markets predicted the chance of a Fed rate cut at its June 18-19 meeting rose to 31%, according to CME Group. The odds of a cut at the Fed’s late July meeting rose to 58%. The Dow Jones industrial average rose more than 200 points on growing anticipation of a rate cut. On Friday morning, the yield on the 10-year Treasury bond dipped 0.06 basis points, or 2.8%, to 2.06%, nearing the lowest level since 2017.
"These data make it easier for the Fed to (lower rates) either this month or next, if the trade tensions intensify and the stock market drops sharply," Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a note to clients.
Yet the Fed faces tough choices. Monthly job numbers can be volatile. Payroll growth has been choppy but solid this year, with average gains of about 164,000 a month, down from 223,000 last year but well more than enough to keep lowering the unemployment rate.
Meanwhile, stocks advanced Thursday on the news that the U.S. and Mexico made progress in talks on President Donald Trump’s demand that Mexico do more to stem the flow of Central American illegal immigrants through the Mexican border. The White House, however, has not yet backed off its threat to impose tariffs on all Mexican imports on Monday if Mexico doesn’t take more aggressive action.
More broadly, job growth is expected to slow from 223,000 in 2018 to about 175,000 this year as the effects of federal tax cuts and spending increases fade. And the historically low unemployment rate has made it tougher for businesses to find qualified workers, a dynamic that’s also likely to crimp job growth.
Wage growth slows
Average hourly earnings rose 6 cents to $27.83, pushing down the annual gain from 3.2% to 3.1%.
Yearly pay increases began edging over 3% in the second half of 2018 but haven’t accelerated beyond that, and even ticked down recently. That helps keep inflation subdued and the Fed from raising rates. Wage growth and inflation that pick up could pose a dilemma for a Fed that now seems more inclined to reduce rates in response to the trade standoff and slowing economy.
Jobs, Trump and the 2020 election
Trump’s moves to ratchet up the U.S. trade fights with China and Mexico likely occurred too late to affect the May jobs survey, which was conducted the week that includes May 12, Goldman Sachs wrote in a note to client. But Morgan Stanley said the mounting skirmishes could have crimped employment. Trade jitters that dampen business hiring and investment may begin to take a political toll on Trump as the 2020 presidential campaign heats up.
“What really matters is if there’s a trend,” says Ron Bonjean, a GOP strategist who worked at the Commerce Department under President George W. Bush. “We have to see several months or more of a downward cycle of job growth in order for it to be called a trend and for that to be raised as a serious issue for Trump’s presidential re-election.”
The near-term question is whether the Fed links a significant slowdown in job growth to wavering business confidence amid the trade fights – which it could try to address with lower rates – or to a natural outcome of worker shortages as unemployment falls.
"This will be the tension that the Fed will need to navigate at its upcoming meeting," says economist Leslie Preston of TD Economics.
Industries that are hiring
Professional and business services led the job gains, with 33,000. Leisure and hospitality added 26,000; health care and social assistance, 24,000; and construction, 4,000.
Manufacturing, which has been hurt by a slowing global economy and the trade conflicts, had another lackluster month, adding just 3,000 jobs. And retailers, grappling with shoppers’ shift to online purchases, lost 8,000.
Broader jobless measure drops
There were some bright spots in the report. A wider gauge of unemployment -- that includes part-time workers who prefer full-time jobs and discouraged Americans who stopped looking, as well as the unemployed – fell from 7.3% to 7.1%, the lowest since 2000. The ranks of the so-called involuntary part-time workers tumbled by 300,000 to nearly a post-recession low.
What it means
The disappointing report fuels concerns that the escalating U.S. trade clashes with China and Mexico are starting to ding business confidence and hiring. But the recent slowdown in job growth also could stem from a low unemployment rate that’s causing more worker shortages – a normal development in the latter stages of an economic expansion.
“On balance, we still think Fed officials will want to see evidence of more sustained weakness before taking action, but we are increasingly convinced that the Fed will begin cutting interest rates later this year,” economist Andrew Hunter of Capital Economics said in a research note.
Contributing: Michael Collins
This article originally appeared on USA TODAY: Economy added just 75,000 jobs in May, strengthening case for Fed interest rate cut