Unemployment Rate Drops to 5.8%

Unemployment Rate Drops to 5.8%

The unemployment rate pulled back to 5.8% in May from 6.0%, its first drop since February, moving our indicator into the neutral zone for bonds (B0644). Expectations were for a rise to 6.1%. Nonfarm payrolls increased by 41,000, below expectations of 60,000 (E0117). But April's 43,000 jobs gain was wiped away to a gain of 6,000, so employment growth remains sluggish. Annual benchmark revisions have also been applied to the data.Labor inflation is still not a problem. Average hourly earnings rose three cents, or 0.2%, slowing the y/y change to 3.2%, the lowest since May 1996 (E736).

We have been arguing that the Fed won't hike rates until the unemployment rate comes off its peak, which happened today. But despite the drop in the unemployment rate, the rate of job creation remains subdued, consistent with our expectations. We still believe August is the most likely time for the first hike.

The drop in the unemployment rate was due to both less people being unemployed and more people reported as employed. Those counted as unemployed fell by 243,000 (E160). The number of job leavers also pulled back in May (E0119). The number of people working part time for economic reasons fell 3.7%, while those working part time for noneconomic reasons rose 0.5% (E0158). The number of employed rose by 441,000, causing the labor force to rise by nearly 200,000 (E0163). As a result, the labor force participation rate held steady at 66.8%, while the employment-population ratio climbed to 62.9%. Additionally, alternative measures of the unemployment rate all showed improvement (E0150).

Most of the increase in payrolls came from the services industry, which added 68,000 jobs, boosted by a 25,000 gain in help supply (E0114).
Manufacturing continues to shed jobs at a slower rate, losing 19,000 positions (E0115). Most other major industries showed no significant change.

The average workweek remained unchanged at 34.2 hours, as did the manufacturing workweek at 40.9 hours. Factory overtime rose to 4.3 hours from 4.2. But overall aggregate hours worked slipped by 0.1%, while manufacturing aggregate hours worked fell 0.2% (E0112), indicating continued strong productivity. On the positive side, the diffusion index climbed to 50.6, the highest since March 2001 (B647). -- KH

Wholesale Sales Up, Inventories Down
Wholesale inventories fell 0.7% in April, well below expectations of -0.1% (E0210). It was the 16th consecutive monthly decline. Additionally, March was downwardly revised to -0.3% from an unchanged reading. Inventories were mixed by category. Led by a 2.0% reduction in auto inventories and a 1.2% drop in computer equipment, durable inventories fell 0.6%. Lumber and furniture stocks rose. A 3.0% decline in apparel inventories and a 1.3% drop in drugs led the 0.9% fall in nondurable goods. Sales rose 1.6%, causing the inventory-to-sales ratio to fall to 1.23, its lowest level since 1984 (E0211). Wholesale inventories are now 7.0% below its year-ago level (E0213).We expect an inventory build to begin in the coming months. -- KH
In this week's Bond Market Focus to be released later this afternoon, we will compare the current economic cycle with past cycles.


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