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The May Jobs Report Was Better Than It Looked

The May report was admittedly not a great-looking one, but perhaps its biggest sin was that it was a wide miss of expectations. Employment data tends to lag changes in the economy, so one consolation is that the reported slowdown in hiring may be attributable to the winter warm-weather effect of fewer jobs being shed in January, February and March - and to May 2010 (read on).

It does seem safe to say that the job market is not accelerating: The non-farm payroll increase of 69,000 was less than half the expected number of about 150,000. Downward revisions of (-55,000) to the previous two months, themselves shy of expectations at the time of release, are never a good sign. Weekly hours were unchanged, weekly earnings fell and the weekly aggregate payroll index shed a tenth. The increase of the last three months can entirely be accounted for by part-time workers. Long-term unemployment (greater than 26 weeks) increased.

However, we wouldn't say employment is doing all that badly either, more that it's chugging along at steady-but-slow rates. Some of the headline data were hurt by seasonal factors and perhaps a lingering after-effect of the warm winter weather. Construction, for example, is showing three consecutive months of losses that net to (-47,000), despite increases in spending of +0.3% for the last two months. That could well be a seasonal distortion: with fewer workers sidelined by winter weather in what are usually the cold and dark months, fewer get added back in the spring. The adjustment factor converts the total to a decline.

There were bright spots in the May report. The unemployment rate amongst the college-degreed fell to 3.9%, which is really quite low. The participation rate picked up a couple of ticks for the first time in a while, explaining the one-tenth increase in the unemployment rate. Transportation and warehousing jobs, which have some leading indicator value, were reported to have healthy increases. The household survey showed an increase of 422,000.

Looking deeper into the data, though, is what produces some interesting facts. The unadjusted, or actual increase in May non-farm payrolls was 789,000 jobs. The May average going back to 1980 is 780,000. Adjusting for the size of the work force, the average increase for May as a percentage of the April workforce is 0.703% since 1980; last month was 0.601%. That is still a tad below average, but since the year 2000 the average is a more modest 0.586%, putting May above the mean for recent years. In 2006 for example, the May increase was 0.603%, nearly identical to this year (and also four years out from recession).

We really don't want to appear enthused over what is modest data, but the reality is that the 2012 May unadjusted increase is better than last year (+649k). The year-over-year percentage increase in May payrolls (unadjusted) was 1.29%, versus the 1981-2012 average of 1.24% and last year's increase of 1.18%. However, the May 2010 increase was 1,120,000 (unadjusted), the strongest May since 1996 (absolute) or 1998 (percentage), and that outlier is undoubtedly weighing on the seasonal adjustment factor.

We say that the data show a job market that is neither strong nor weak. The April over December change in real employment (leaving out seasonal adjustments) dropped to a minus 27,000 after the revisions, which isn't a sign of a booming market. But it isn't terrible either, and a modest negative is no death knell. Some good years for the market and the economy (e.g., 1995-1996) have produced weaker changes. The May numbers are better than the Bureau's report.

For that matter, April had an increase of 857,000 in the unadjusted monthly payroll series, which helps explain the modest increases in personal income (+0.2%) and spending (+0.3%) for the month. Real disposable income was up 0.6% from a year ago. That's not a lot, but it is an improvement and the best reading since October. The year-on-year increase in real spending (PCE) was 2.1%, the best since September. But the April 2010 increase in unadjusted, non-farm payrolls was 1,129,000, more than 25% higher than April 2012, which goes a long way to explaining why the April seasonally adjusted increase only comes out to 77,000.

The usual explanations for real spending (5.2% annualized rate in the first quarter) outpacing real income (3.4% Q1 annualized rate) are usually that Americans are dipping into their saving, and in particular wealthy American are liquidating assets to maintain spending. May income was up 0.2%, while spending up 0.3%. But we think there's a simpler explanation: auto sales.

The American car fleet is at near-record age levels, and credit is widely available at low rates. Ergo, we are replacing our older cars with new ones. The quarterly increase in total real spending in the first quarter of 2012 was about $63 billion. About $46 billion was spent in the quarter on new motor vehicles. Not all of the vehicle total comes from consumers, but we reckon enough of it is to fill the gap between spending and income. It isn't that we're dipping into our savings or spending money we don't have, it's that we're buying more cars than we did a year ago and taking advantage of attractive financing terms.

That isn't a warning sign of a struggling consumer. New car sales in May held up fairly well, ahead of expectations. Remember that 3.9% unemployment rate for the college-degreed, and consider also that the unemployment rate for the over-25 population is a more reasonable 6.9%.

We'll say it again - employment is a lagging indicator. Caution is clearly setting into the U.S. markets, whether one looks at the latest factory orders data, weekly chain store sales series that talk about a negative May, or a month's worth of declining weekly mortgage-purchase data (we don't have to tell you about the stock market). The headlines about Europe and declining equity prices are taking a psychological toll. We have steadily resisted the idea that GDP would accelerate up past 2.5% this year, and doubt that the current quarter will surpass a 2.0% annual rate.

All that said, the employment situation isn't as bleak as the recent instant analysis, and the Fed knows it too. If Europe can at least partly get its act together this month, some confidence would return to markets. China would likely feel better about undertaking some modest stimulus, and risk assets and the economy would probably do alright until fiscal-cliff time returns in January. But let's deal with one bad dream at a time, and hope that Europe can wake up Chancellor Merkel soon. As Ben Franklin would tell them, if they do not hang together, they most assuredly will all hang separately.