Unemployment in the United States has fallen to 4.7 percent in May but the number of non-farm payroll jobs created in May was a paltry 38,000, far below the expectation of about 160,000. The low unemployment number is thus not because more people found jobs but because people dropped out of looking for jobs and, therefore, were not counted among the unemployed. A measure of unemployment which includes those who dropped out of searching for jobs stood at 9.7 percent.
Fed policy makers, including Fed Chair Janet Yellen, in public remarks, expressed the opinion that the Federal Open Market Committee (FOMC) could raise the federal funds rate sometime this summer because the U.S economy is growing and the labor market is tightening. Many now think that the May jobs report clouds the outlook for any interest rate increase in the coming three months because far fewer jobs than expected were created and the labor participation rate has decreased.
The decision facing the FOMC for the June meeting is to interpret the May jobs report as whether far fewer jobs than expected were created because the economy is at full employment or aggregate demand has weakened, substantially slowing hiring.
U.S GDP growth during the first quarter of 2016 was at a modest 0.8 percent while reliable forecasts for the second quarter – based on incoming data by both the Federal Reserve Bank of New York and Federal Reserve Bank of Atlanta – are exceeding 2 percent. In fact, the Federal Reserve Bank of New York’s “Nowcast” for the third quarter of 2016 is also exceeding 2 percent. U.S GDP outlook for the next 2 quarters based on incoming data, including personal consumption expenditures, is thus looking more robust than the GDP growth for the first quarter and is close to the potential growth rate for the United States. The forecast data does not portend a slowdown. Further, inflation is hovering close to but below the Fed’s target of 2 percent.
Though consumer sentiment presents a mixed picture for the summer months with data coming in below expectations, consumers are engaging in precautionary saving behavior and household wealth has increased because of a rise in home prices. Personal consumption expenditures and consumer sentiment do not point to any upcoming weakness in aggregate demand.
Given the data, the best interpretation of the May jobs report seems to be the behavior of the economy at full employment. Unless broader economic conditions deteriorate, the Federal Reserve can stay on course to raising the federal funds rate sometime this summer because, despite any small increase, monetary accommodation would continue to remain extraordinary.