Friday’s jobs report was very bad. The U.S. economy added just 75,000 non-farm jobs in May, which was 100,000 less than expected. Job gains in March and April were also revised significantly downward. It is now clear: Job growth in 2019, while still positive, is significantly slower than in 2018.
The economist Jason Furman, who was a top economic adviser to President Barack Obama, notes on Twitter this shouldn’t necessarily be surprising or concerning. As the economy approaches full employment, job growth should slow down: At some point, there just aren’t enough potential workers for employment to grow very fast. But when you reach that point, wage growth should speed up, because as companies run out of potential workers to hire, they should be bidding against each other for the few who are available. Instead, this report shows wage growth slowing down (though, again, still positive). That, Furman says, is the truly alarming part of this report.
Naturally, on Friday morning, stocks are up. That’s because the weak jobs report further increases expectations that the Federal Reserve will soon start cutting short-term interest rates to support the economy. Longer-term interest rates are already falling in expectation of that cut in short rates. Lower interest rates push up stock prices because they make stocks a more attractive investment relative to bonds, and also because of the expectation that easy Fed policy will improve economic growth and lead to higher corporate profits.
While it may seem perverse for stock prices to rise on bad news, it’s worth considering the possibility the bad news in the jobs report was already priced into stocks before it was released. In theory, a purpose of the financial markets is to aggregate market participants’ knowledge about economic conditions even when that knowledge is not yet printed in a government report. If the markets already “knew” May job growth had been weak, the main new information in the report may have been that the Fed would also know what happened in May and is therefore more likely to cut rates.
One thing I’ve written about repeatedly in the last few months is the apparent disconnect between data about economic output, which has sent some worrying signals, and data about employment, which has mostly looked robust. In the winter, this conflict appeared to resolve in favor of the employment numbers, showing a continued positive outlook. Today’s report is a data point in favor of the idea that employment is slowing to line up with the output data — which is a reason to be more worried about economic conditions over the next year to 18 months.
