US non-farm payrolls rise by just 38,000 in May

Hiring Stateside slowed sharply during the month of April, leading some top-ranked economists to warn of the risk of an economic recession in the US in the not-too-distant future.

Non-farm payrolls rose by just 38,000 in May, according to the Bureau of Labor Statistics, coming in beneath the monthly average for the current economic cycle for a third time in just four months.

"Slowing persistently below its expansion-average points to higher risk of a recession" - Michael Gapen, Barclays

“History suggests that payroll growth slowing persistently below its expansion-average points to higher risk of a recession. Since 1960, when payroll growth has dipped persistently below its recovery-period average, the US economy has more often than not found itself in an NBER-defined recession 9 to 18 months in the future,” Barclays´s Michael Gapen said in a research note sent to clients.

The pace of job growth in May was also far below the 160,000 rise which analysts had anticipated.

In parallel, non-farm payroll growth for the previous two months was revised down by a combined 59,000.

The unemployment rate dropped from 5.0% in April to 4.7% in May (consensus: 4.9%), albeit due in part to a drop in the labour force participation rate from 62.8% to 62.6%.

To take note of, it was not uncommon for the pattern of growth in the unemployment rate and in the non-farm payrolls statistics to diverge sometimes, as the data are collected via two different surveys.

Temp-hiring particularly weak

Hiring in the private sector printed at just 25,000 for May, down from the 130,000 jobs which were added in the month before and the rise of 256,000 observed during the same month one year ago.

Goods producing firms shed 36,000 jobs last month (Mining: -11,000; Construction: -15,000, Manufacturing: -10,000) while hiring in the private services sector slipped from 144,000 in April to only 61,000 in May.

Professional business services saw the largest swing from one month to the next, with employment falling from 55,000 in April to 10,000 in May.

Within that category, hiring in temporary help services was conspicuously weak, registering a decline of 21,000; some economists had expected a substantial increase as Verizon Communications brought in extra help to offset the strike launched by its staff on 13 April.

Average hourly earnings grew by 0.2% month-on-month (2.5% year-on-year), in-line with economists´ forecasts.

The length of the average workweek was unchanged at 34.4 hours (consensus: 34.5).

Economists split

Commenting on the latest jobs data, Chris Williamson, chief economist at Markit, said: “The disappointing payrolls report casts doubt on the widely held view that the US economy is rebounding strongly in the second quarter after a dismal start to the year. [...] Markit’s flash PMI […] also showed a growing reluctance for hiring as firms saw disappointing order book inflows and grew increasingly cautious about the economic outlook.

Dr.Harm Bandholz, chief US economist at UniCredit Research, added: "While we do not want to dismiss the report, we think that we have to take it with a large pinch of salt. After all, all other labor market indicators, including jobless claims or the JOLTS numbers, have not shown any signs of weakness.

"So either the May weakness in payrolls will be revised away or we see a rebound in the following months. But at this point, this is only an expectation. The Fed will have to make a decision on interest rates in less than two weeks, and this is the last employment report they have at hand."

Pound, yen fly

As of 13:47 BST cable was 0.54% higher to 1.4502, alongside a 0.99% drop in dollar/yen - widely considered a proxy for risk aversion - to 107.82.

According to the Chicago Mercantile Exchange´s Fed Watch tool, derivatives markets were assigning just a 3.8% probability to a 25 basis point interest rate hike when US central bank policymakers next met on 15 June.

For the 27 July meeting of the Federal Open Market Committee, the US central bank´s main policy organ, markets were attaching an implied probability of 38.2% to a 25 basis point move.