Global Perspectives Report Global Perspectives Report

Markets Hail Weaker Jobs Data

by Peter Donisanu, Investment Strategy Analyst

Key takeaways

  • This month’s release of the May jobs report missed market expectations of 175,000 new hires.
  • The latest data release reinforces a weakening trend in the labor market, which we believe is reflective of a broader slowdown in the U.S. economy.

What it may mean for investors

  • We expect market volatility to remain elevated this year as investors balance rate cut expectations, geopolitical uncertainties, and likely weaker economic releases.

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The recent monthly jobs report release showed that the U.S. added just 75,000 net new jobs in May, missing market expectations of 175,000 new hires. The establishment survey also showed that wage gains cooled last month—as wages rose by 3.1% from a year earlier—compared to 3.2% in April. What’s more, the household survey showed that the labor force participation rate for the key 25-54 age demographic fell to an 8-month low as unemployment held steady at 3.6%. Looking ahead, we see an increased risk of more disappointing jobs data as we expect U.S. economic growth to soften.

Chart 1. Nonfarm payrolls disappoint in May—add to weakening net new hiring trend

Chart 1. Nonfarm payrolls disappoint in May—add to weakening net new hiring trend

Sources: Wells Fargo Investment Institute, Bloomberg; June 13, 2019.

More job weakness may lie ahead

Looking at longer-term hiring trends, we note that an average of 164,000 new monthly jobs were created during the first 5 months of 2019—compared with 229,000 over the same period last year. What could be contributing to this slowdown?

When compared to changes from a year ago, hiring in the manufacturing, construction, and retail trade industries has cooled. Manufacturing purchasing managers’ indices (PMIs) have continued to fall, and factory orders have disappointed this year. Ongoing weakness across the real estate market has been evidenced in reports on new housing starts and permits missing expectations—as well as slowing home sales and prices. Retail sales growth is half of what it was last summer. We anticipate that these trends will continue as trade and other policy uncertainties abound. We expect these weaker economic trends to translate into softer hiring activity throughout the course of this year.

Could bad news be good news?

While the May jobs report was disappointing, market participants took it in stride earlier this month as equity prices rose on the news. We believe that a key reason for the U.S. stock rally was rising market expectations for at least one rate cut by the Federal Reserve (Fed) this year. Our current expectation is for a single Fed rate cut before year-end.

There is some hope that the Fed can stabilize a slowing U.S. economy through its monetary policy changes. Whether it can do so likely will depend on how actors in the real economy respond to potential policy changes

For now, a host of policy and geopolitical headwinds have clouded business leaders’ ability to plan for the future—as uncertainties abound. This is a key reason why we expect slower U.S. economic and earnings growth this year. In such an economic environment, we anticipate higher market volatility. This is one reason why we favor trimming excess risk exposure and aligning portfolios toward long-term investment goals, even as optimism surrounding a potential Fed rate cut provides a temporary boost to risk sentiment.