It is somewhat hard to believe that it is once again the first Friday of the month. This means that it is time for yet another jobs report from the Bureau of Labor Statistics. In this case, the report was rather disappointing as job creation numbers greatly missed the expectations of analysts and average hourly earnings also declined. This report likely increases the chances that the Federal Reserve will cut rates at its next meeting (or perhaps the one in September). This strengthens the argument to have some money invested in fixed income, which I have discussed in a few recent articles.
As just mentioned, the non-farm payrolls number missed the expectations of economists by a fairly large degree. The expectation was that the economy would create 175,000 jobs in May. The actual number from the report was 75,000. This was the lowest number since February and was one of the lowest prints since the early days of the Obama Administration.
Perhaps one of the most disappointing things about this report is that it was lower than the estimates of all 77 Wall Street analysts. There was not a single one among them that guessed a lower number. It was also a full four-sigma below the consensus:
In addition to the disappointing print that we saw this month, the Bureau of Labor Statistics revised both the March and April numbers downward, removing 75,000 jobs in aggregate. This adds to the convictions that I have published quite a few times on this that the economy is not nearly as strong as many in the media have been leading us to believe. This is one reason to believe that the Federal Reserve will opt to cut rates at its next meeting in order to fight against this weakness.
Further evidence of the economic weakness here comes from looking at the longer-term trend. Since the end of the Great Recession, the American economy has created an average of 175,000 jobs per month. As a result of these downward revisions, job growth is now below its long-term average. This can be seen quite clearly here:
Another disappointment here comes from the breakdown of full-time and part-time jobs in the report. In May, the number of full-time jobs declined to 129,625K, which was not only a month-over-month decline of 83,000 but also represents the third consecutive month-over-month decline. This decline was somewhat offset by an increase of 66,000 part-time jobs during the month. This has generally been the trend over the course of this year:
It should be fairly obvious to see why this is a problem for the economy. As a general rule, part-time jobs generate much less income for the job holder than a full-time job would. This makes it much harder to do things like start a family, buy a house, and support the economy through discretionary spending. This is particularly true in the United States given that around two-thirds of the American economy is dependent on consumer spending. This also reinforces our conviction that the Federal Reserve will begin cutting rates in relatively short order.
Finally, we also see evidence that the economy is slowing down by looking at wage growth. In a strong economy with a strong demand for workers, we would expect to see wage growth since employers are forced to offer more money to entice potential employees to join their firm over their competitors. In May though, average hourly earnings increased only 0.2%, which was below the 0.3% expected. In addition, average hourly earnings are only up 3.1% year-over-year, which was below the expectations of 3.2%. It also represents a slowdown from what we saw earlier this year:
This adds further support that the demand for labor is slackening, which is something that we would expect to see in an economy that is slowing down. This is likewise supportive of our thesis that a rate cut may be coming down the pike.
The obvious way to play a coming rate cut is purchasing bonds. This is due to the fact that bond prices typically move inversely of interest rates as older bonds reprice themselves higher so that investors receive the same yield as similar bonds that are freshly issued at current interest rates. One potential way to play this is the Vanguard Total Bond Market ETF (BND). This fund has performed fairly well this year as investors have already begun to buy into it in both a flight to safety and an expectation that the central bank will indeed cut rates in the near future:
The fund still appears to have room to run though as the rate cut has not yet become a done deal. We can therefore expect to see it continue to deliver pricing strength should the bank actually execute a rate cut and thus drive yields down.
In conclusion, the May jobs report was very disappointing and was clearly much worse than what analysts expected. We are certainly seeing signs that the economy is slowing down here but ultimately this may prove to result in the Federal Reserve cutting rates, which the future market currently expects. Investors can take advantage of this by buying bonds or bond funds, such as the Vanguard Total Bond ETF. This fund has already delivered fairly strong performance this month but it certainly has room to run, especially if the Federal Reserve cuts rates. This may be worth taking advantage of.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have been aggressively buying bonds for my own individual portfolio. I have not purchased BND or any other the other bond ETFs but have instead been doing it using actively-managed funds.