USA: Nonfarm payrolls… signal or noise?

The weakness of job creations in May clearly surprised market participants and revived fears of a recession: nonfarm payrolls (NFP) increased only by a meager 38 000. Even corrected to take into account the strike at Verizon, job creations would only have reached 73 000 over the month. The fall in the unemployment rate from 5% to 4.7% was barely more reassuring as it was only the result of a fall in the participation rate.

While we were also surprised by the weakness of the last labor report, we are not as pessimistic as some. First, as Yellen put it, “one should never attach too much significance to any single monthly report.” It has, in particular, to be remembered that those employment figures are very volatile (the confidence interval of this survey is ± 115 000) and subject to revisions. Moreover, other indicators are not so dramatic: initial jobless claims remain at a very low level and the ADP survey recorded 173 000 job creations over the month (chart 1).

In addition, at this stage of the recovery, some slowdown in the pace of job creations should come as no surprise: productivity has been particularly weak over the last couple of years and a re-acceleration is to be expected. As Thomas Perez, the labor secretary, recently explained: “The closer you get to the summit of full employment, the more trade-offs there will be between somewhat slower job growth and rising wages, and that’s what we’re beginning to see here in this recovery.” Our scenario assumes a pace of 150 000 job creations per month (as opposed to 230 000 last year) (chart 2), offset by a further acceleration of wages from 2.5% today to 3% (chart 3), which would enable compensation to continue to grow at a 5% pace.

Of course, if job creations were to continue for a couple of months to be as weak as in May, we would change our mind !