Job Market Slows Amid Trade Tensions
The US labor market created a disappointing 75,000 jobs in May as wage growth declined to 3.1 percent.
The US labor market, which has been the backbone of the current economic expansion, appears to be faltering. This comes as trade tensions with China – and now Mexico – are rising. In May, the US added a disappointing 75,000 jobs and annual wage growth slowed from 3.2 percent to 3.1 percent. The strong employment growth over the past two months was also revised down by a net 75,000 jobs as April’s numbers were cut from 263,000 to 224,000, and March’s from 189,000 to 153,000. Despite the slowdown in hiring, the unemployment rate remained near a five-decade low of 3.6 percent. The labor force participation rate – which is the ratio of individuals working or looking for work – was level at 62.8 percent.
Top Takeaways from the Report
The labor market’s best days are behind it
Job creation in the US has likely peaked and will continue to weaken in 2019. Over the last three months, employers added an average of 151,000 jobs per month, which is slower than the pace over the last six months of 175,000 jobs per month. The slowdown in hiring, however, is not necessarily surprising given the nation’s very low unemployment rate of 3.6 percent and the inability of higher wages to encourage more individuals to rejoin the labor force. Without additional workers, employers have a shrinking pool from which to hire, making employment growth more difficult.
Adding to the labor market weakness is the growing uncertainty spurred by ongoing trade spats. The Trump administration has continued to pursue tariff hikes against Chinese imports and China has retaliated in tit-for-tat negotiations. This back and forth has introduced uncertainty into the economy and has made it increasingly difficult for businesses to plan ahead and make hiring decisions. The latest announcement of tariffs against Mexico – in order to stop illegal immigration – may introduce the most uncertainty yet as it caught markets off-guard and opened the door to an entirely new dynamic in trade tactics.
Fed officials are poised to cut rates in the near future
The Fed’s change of tone in 2019 has been abrupt and full of conflicting signals. After raising rates four times in 2018 and pointing toward more hikes in 2019, the Fed’s likely path is now to cut rates in the coming months. Fed officials have become increasingly concerned by the economy’s inability to generate inflation up to their 2 percent mandate despite the higher trend seen in wage growth over the last six months. With May’s employment report hinting at labor market weakness, the ongoing trade dispute with China and now Mexico, and low inflation readings, the stars are aligned for the Fed to cut rates.
Growth by Select Industry
- Professional and business services added the largest number of jobs in May at 33,000. The sector has added 498,000 jobs over the past year.
- Employment in the manufacturing sector continues to remain weak, adding only 3,000 jobs in May. The sector has added an average of 6,000 jobs per month in the first five months of the year, down from an average of 22,000 per month during the same period last year.
- The construction sector added 4,000 jobs in May. This is down from 30,000 jobs the sector added in April, and well-below the 37,000 jobs it added in May of last year.
The Bottom Line
After expanding for 104 consecutive months, the labor market appears to be faltering. With the very-low unemployment rate making it difficult for employers to find qualified labor and growing uncertainty surrounding trade negations, job creation is likely to remain below the highs seen in 2018. Expect Fed officials to cut rates in the coming months as they try to bring inflation back up to their 2 percent target and combat looming economic weakness.
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