One expert explained after the weakening jobs market, many are taking a more conservative view on policy tightening.
“The May jobs report was a disappointment as job growth failed to meet expectations and revisions reduced gains from prior months,” said Curt Long, National Association of Federally Insured Credit Unions chief economist. “The participation rate fell, and wage growth showed no improvement.”
“Despite the poor May returns, the Fed's view of the labor market remains strong enough to support a quarter-point rate hike later this month,” Long said. “But the slowing pace of job growth combined with still-muted wage growth may lead some officials to downgrade their expectations for further policy tightening in the second half of the year.”
However one expert explained that despite the disappointing numbers, the report shows the economy is moving in the right direction, and that a June interest rate hike is still a high possibility.
“But in general, this morning’s job report confirms that the economy is continuing to head mostly in the right direction, with the unemployment rate at a very low 4.3%,” Zillow Chief Economist Svenja Gudell said.
“It isn’t perfect, the retail sector continues to shed jobs at an alarming pace, and the overall number of jobs added isn’t much to write home about,” Gudell said. “But there’s not much that would suggest the Federal Reserve might veer away from plans to further raise benchmark interest rates soon.”
Other experts agreed a June rate hike is still on the table, pointing out the unemployment rate fell to a 17-year low.
“The survey evidence suggests that the standard unemployment rate will drop below 4% soon,” Capital Economics Chief Economist Paul Ashworth said. “The upshot is that, even if core inflation remains stubbornly below the Fed’s target, it will continue to hike interest rates, with a June rate hike a near-certainty at this stage.”
And the employment gains are still enough to keep demand for housing strong, one economist pointed out.
“Although job gains in May were on the soft side, 138,000, the annual figure has been fairly consistent at over 2 million net new job creations,” said Lawrence Yun, National Association of Realtors chief economist. “This implies that housing demand, which is more determined by long-term consistent prospects, still remains strong.”
But not everyone sees a positive side to the report. In fact, one economist says this report does not meet the standard required for raising the federal funds rate.
“The drop in the unemployment rate to the lowest level in 16 years was because of a large decrease in the labor force that outpaced a decline in household employment,” Fannie Mae Chief Economist Doug Duncan said. “This report, combined with other factors including declines in auto sales, raises questions about the recent hawkish tone of Fed officials, who have hinted at potentially more rate hikes and a start of the process of balance-sheet shrinking this year.”
One expert focused on the lackluster growth in the construction market, saying it continues to hold back housing inventory.
“May saw modest gains in residential construction employment as labor scarcity continues to constrain the sector,” said Robert Dietz, National Association of Home Builders senior vice president and chief economist. “Home builder and remodeler employment increased 7,100 in May and has increased slightly more than 120,000 over the past year.”
“The cost and availability of labor is a key constraint determining the growth of home building, despite favorable demand conditions and limited existing home inventory,” Dietz said.
This chart from First American Financial Corp. shows how housing starts correlates to the rise and fall of construction laborers.
Click to Enlarge
(Source: U.S. Census Bureau, Federal Reserve Bank of St. Louis, First American)