If you keep an eye on the news, you have likely seen that job growth in May hit precipitously low numbers, stunning most economists with the miniscule increase in employment.
On the surface, this is cause for great alarm. A closer inspection is always warranted when numbers that have been on a steady trajectory suddenly fall off out of nowhere.
A Closer Look at the Numbers
Understanding how job growth will impact the economy starts with a little scrutiny regarding the numbers and what they mean. The first number to examine is job growth.
The net increase in jobs for May was only 38,000. This number would have been roughly doubled, but a large-scale strike of Verizon workers kept an additional 30,000+ workers off of payrolls. The strike has been settled and those people are back to work.
Even including the strike workers, May’s job growth is below 100,000, and far below original estimates that expected 155,000 new jobs for the month.
The next key number is unemployment. Despite the small increase in new jobs, unemployment dropped three points to 4.7. Most of this is because 458,000 people left the labor force for a variety of reasons.
For the second month in a row, overall labor force participation fell by 0.2 percent. A static view would suggest that job increases and unemployment drops lead to vastly different states of economy, but the two are closely related.
In general, low unemployment leads to a slowdown in job growth simply because there are fewer qualified individuals looking to fill job openings. This appears to be the case with the May numbers, and many economists predicted similar results, if a little farther down the line than May.
The third major number to consider is wage growth. It rose again in May, by five cents. This brings the average American income up to $25.59 per hour. This is also in line with unemployment trends.
As new positions become harder to fill, demand on laborers goes up and their wages are raised in kind. This can have an additional effect of enticing workers back into the labor force, complicating the system but ultimately increasing economic growth and stability.
Interpreting Results
A decline in job growth is in line with predictions, but May’s drop was sharper than anticipated. The unemployment decrease was also more dramatic than analysts were expecting. Wage increases have been a little steadier. Combining these three results paints an economic picture that is positive, but not explosive.
American and global GDPs have been slowly increasing over the past five years. Trends suggest that growth will remain positive and slow.
The increases in wage and overall labor participation will put more money in the economy and improve spending, allowing for this growth, but none of the changes are extreme enough to break the current pace.
This means that the Fed will likely move forward with their plans to raise interest rates, but most experts agree that they’ll delay the hike another month.
With growth as slow as it has been, interest rates are one of the major factors that threaten to reverse trends and create a recession, so you can expect the Fed to move forward carefully.
Despite these factors, the biggest influences on the American economy are foreign. China’s bleak situation is having a massive impact on the global economy.
As they burn their reserve to try to slow the Yuan’s decline, the USD gains value. This helps U.S. spending and spurns global growth, but at the same time it inflates the value of U.S. based debts, making interest increases even more dangerous.
Oil also plays into the mix, with its bottomed-out prices hurting growth in many sectors. It appears to be rebounding, but the pace is slower than most economists would like to see.
Less spending on oil has meant less capital across the globe, and until oil prices return to a healthy level, you can expect global economies to reflect the struggle.
In short, the job growth decline is not likely to hurt economic growth in the U.S. If anything, it’s spurning wage increases and driving up consumer confidence more than any time in the last decade.
More important factors that will dictate the economic strength of the country are tied to international trade: chiefly China and oil. Those are the numbers to pay attention to as you make financial decisions.
Regards,
Ethan Warrick
Editor
Wealth Authority
