For two months running, the labor market’s growth has been mild, at best. The 200,000-plus growth in private payrolls in each of the three months through this past February now looks like ancient history. Pessimists will cite today’s news as clear evidence that the economy is destined for more trouble, and perhaps a new recession.
It would be foolish to dismiss that possibility in the wake of today’s employment news. The ongoing and apparently deepening economic woes in Europe via the euro crisis only strengthen the case. But it's still premature to argue that the tipping point for the business cycle in the U.S. has been reached and that it's all downhill from here.
For starters, two months of sluggish payrolls growth is hardly definitive. It's not encouraging, and it may be a smoking gun if the weakness rolls on. Statistically speaking, however, it's still quite unimpressive. The difference in net job growth of 80,000 and 200,000 in a labor force of 155 million is a rounding error, at least for the span of a month or two. Keep in mind too that the annual percentage change in the labor force, even after May's weak performance, is near the best pace in the last three years. Private-sector payrolls increased by 1.78% on a year-over-year basis through last month, or only moderately lower than the post-recession high of 2.09% for this past January.
If there is a new recession approaching, the annual rate of growth for private payrolls will start falling dramatically, and soon, month after month. For the moment, the pace in May is virtually unchanged from April's year-over-year rate.
That's no excuse to dismiss today's news, or discount the higher risk that macro turbulence awaits the U.S. economy. But if you're looking ahead based on the numbers in hand (as opposed to speculating how future economic reports will play out), there's still reason to expect that growth will prevail for the foreseeable future.
Indeed, one can point to a number of recent reports that inspire some confidence about the future. April's industrial production, for instance, was quite strong. Perhaps May's update on industrial production will tell us differently when it's released on June 15, but not yet.
Nonetheless, sentiment has clearly taken a hit today. “The robust employment growth at the start of the year has clearly waned,” says Ellen Zentner, a senior U.S. economist at Nomura Securities. “Hiring plans may have been put on hold amidst an increasingly uncertain outlook.”
“There’s no positive spin that can be put on the May Employment report,” says Jim Baird, chief investment strategist for Plante Moran Financial Advisors. “It was a disappointment, pure and simple.”
In that respect, the jig may be up. If the business cycle has gone over to the dark side, we'll soon see clearer evidence.