The cracks that had been showing in other data on the economy became very apparent in the May jobs data. Unemployment held steady at 3.6% – still near a half-century low – but job creation stalled.
The softening in consumer spending and uncertainty related to trade policy have taken a toll in recent months, but the jobs market had remained a relative bright spot. The weakness of this report shouldn’t be overlooked.
Disruptions in trade have certainly played a role, but the slowdown in job creation wasn’t limited to the manufacturing sector. Service sector job creation was cut by more than half over the preceding month’s increase.
Job creation of just 75,000 fell well short of expectations for a result closer to 175,000. Looking beyond that headline number, revisions to the preceding monthly tallies slashed those gains by 75,000. The net result was that the economy effectively created no net new jobs in May.
Expectations have been slowly building that the evident slowdown in the economy would prompt the Federal Reserve to move beyond its balanced stance on policy rates and that the central bank’s next move would be to cut rates. The probability of such a cut just increased.
The fiscal sugar rush provided by tax cuts appears to have largely run its course. Now, the direct negative impact of tariffs and uncertainty around the direction of policy and the global economy are weighing on confidence.
Certainly, trade relations with China remains a major cloud hanging over the economy. A resolution of that dispute would go a long way toward boosting confidence. Conversely, if both sides retrench and the situation deteriorates into a prolonged trade war, the risk to the economy would be substantial.
The bottom line is that the jobs market has been a bright spot for the economy for many years, even when growth was mediocre. The May report is a snapshot in time, but it’s not a pretty picture. Whether it’s an anomaly that will reverse in the coming months or the early signal of a more protracted slowdown in job creation remains to be seen.
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