The disappointing May job numbers released last week have increased speculation that the Federal Reserve ("Fed") may lower its benchmark interest rate to counter a potentially slowing economy — although it remains unclear how fiscal policy will unfold in the coming months amid ongoing trade disputes and rapidly evolving economic conditions.
The Labor Department reported on June 7 that U.S. nonfarm payroll employment increased by 75,000 in May, falling considerably short of analysts’ estimates. Economists surveyed by Bloomberg expected 175,000 job gains for the month. It is important to note that the reported numbers rarely align with consensus estimates and are often either over or under by a significant margin.
However, the reported employment growth represents the fewest workers added in any month from the past nine years. Compounding the concern, job-growth numbers from the previous two months were reduced by 75,000 total jobs, lowering the three-month job-growth average to 151,000. Monthly job gains have so far averaged 164,000 in 2019, compared with an average increase of 223,000 per month in 2018.
“Not only are factories not coming back to America, the existing companies in the country are not churning out new jobs,” Chris Rupkey, chief financial economist at MUFG Union Bank, wrote in a note to investors after the report was released, as reported by The Washington Post. “If this number is to be believed the Trump economics team is going to have to find a new way to boost economic growth as the economy is clearly slowing and a slowing economy does not make business run out and hire a lot of new people to help them sell and produce goods and services.”
Impact on the Fed
In reaction to the unexpectedly gloomy jobs report, many investors have placed a renewed focus on the Fed. Just a month ago, Fed Chairman Jerome Powell downplayed the possibility of a rate cut this summer, but analysts are increasingly expecting action to counter the recent negative economic indicators. According to data from CME Group, as reported by The Wall Street Journal, traders in futures markets are pegging the chances of a rate cut at the Fed’s June 18-19 meeting at roughly 25%, with a 75% probability of a cut at the meeting set for July 30-31.
A rate cut would be a departure from recent Fed policy, and it is not our belief that the Fed will cut rates in July or September. However, before the May jobs report there were indications that it was perhaps willing to act on interest rates, with Powell saying on June 4 that the Fed would “act as appropriate to sustain the expansion.”
Fed officials at their last meeting opted to leave rates unchanged as the Trump administration’s trade war with China appeared to be beyond its peak. However, Trump escalated the dispute days after the late-April meeting, hiking tariffs on $250 billion of Chinese goods, which prompted China to retaliate with higher tariffs on American products. Those actions were compounded last month by Trump’s threat to impose tariffs of up to 25% on Mexican imports, although he has since indicated those tariffs will be postponed indefinitely.
We would caution against assuming one month or one quarter of weak employment numbers will prompt the Fed to cut rates since many other economic indicators remain strong. As with all developing situations, we are playing close attention.