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Just when you think everything is okay...

Talk about a surprise – the May job report contained some shocking data and none of it to the upside. According to the Labor Department, the U.S. added just 38,000 jobs in May, well below the estimated addition of 160,000 jobs. This was the lowest monthly gain since 2010. Adding insult to injury, the standard two-month revision fell by 59,000. Economists estimate 35,000 jobs were temporarily lost due to the Verizon strike mid-month. Even when you add those jobs back, the total gains are still under 100,000. Another concerning data point was the loss of 458,000 people from the labor force. This drop brought the unemployment rate to 4.7 percent from 5.0 percent. I am not sure that number can really be trusted, but it will make the headlines tomorrow. It is well-known the job reports can be volatile month to month. Wait until next month to make any assumptions about the labor market. There is a strong chance today’s report will force the Federal Reserve to postpone the next rate increase until at least July.

Other Key Indicators this Week:

Spending – The consumer is alive and well, much to the relief of economists. Personal spending surged by1.0 percent in April – the strongest monthly increase since August 2009. The rebound was a welcome change from the 0.1 percent average rate for the first three months of the year. The bulk of the spending came from a 5.6 percent increase in auto sales. A related report from Ward’s Auto reflected the rebound continued in May. The seasonally adjusted annualized rate of auto sales in May measured 17.37 million, up from 17.32 million in April. In addition to autos, durable goods sales, which include big-ticket items such as computers and appliances, increased 2.2 percent. The renewed strength in consumption bodes well for economic growth in the second quarter. Consumer spending is the largest contributor to GDP. Incomes rose 0.4 percent in April, matching the previous month’s increase. The higher spending to income level reduced the savings rate to 5.4 percent from 5.9 percent. This is still above the 10-year average of 5.2 percent.

Manufacturing – The data on the manufacturing sector continues to be volatile and confusing. Two reports this week gave different views of the industry. This was the fifth contractionary reading in the past nine months. The first report, the Chicago Purchasing Manager’s Index, fell to 49.3 in May from 50.3. Concerns within the report focused on higher production and supply costs coupled with a decline in inventories. Inventory levels were the lowest since 2009. The data suggests that manufacturers are reluctant to carry large inventories due to the volatile level of demand.

The second report of the week was the ISM manufacturing report, a more broad-based look at the industry. The index rose to 51.3 in May from 50.8. The orders and prices paid components both increased, providing some strength to the index. Factories are using the increased orders to shrink inventory levels, which could boost production later in the year.

Strategically for Credit Unions:

The bond market is patiently waiting for the Federal Reserve’s decision on interest rates in a couple of weeks, although the wait may continue until July, after today’s report. In preparation, the yield curve is near the flattest it has been since 2007. The curve has measured between 92 and 96 basis points this week. The short end is affected by the promise of higher rates, while the longer maturities are stymied by low inflation and the concern of slowing economic growth. Note: bond yields fell 10 basis points across the board after the job report on Friday. The levels on the rate sheet are from Thursday’s close.

Sarina Freedland – Senior Investment Officer

Although this information has been obtained from sources we believe to be reliable, we do not guarantee its accuracy, and it may be incomplete or condensed. This is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. All herein listed securities are subject to availability and change in price. Past performance is not indicative of future results. Changes in any assumption may have a material effect on projected results.

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