The Jobs report today showed that employers added just 38,000 workers in May, which was dramatically lower than the 158,000 new jobs that economists were predicting. Despite the low number of new jobs created in May, the official unemployment rate fell to its lowest point in nearly a decade, 4.7 percent down from 5 percent in April. But the decline in the unemployment rate continues to be misleading because a record number of Americans have been dropping out of the labor force. The labor force participation rate declined for the second month in a row, down to 62.6 percent, and the number of people working part time continued to rise to record levels. We also need to keep in mind that historically as the economy gets into the middle of an economic recovery after a recession, we experience a “trade-off” between somewhat slower job growth and rising wages, and that’s what we’re beginning to see in this economic recovery.
One key variable in the jobs report for May is that it was somewhat misleading because it reflected the Labor Department’s classification of more than 35,000 striking Verizon workers as unemployed. Those Verizon employees are already back to work so they will be added as new jobs in the June employment report. The report was also impacted by layoffs in the oil industry, but additional rounds of layoffs are not expected, so the June report is likely to bounce back dramatically.
The average monthly gain for the last three months was 116,000 jobs. The average monthly job gains so far in 2016 have fallen short of over 200,000 per month on average over the last two years, a pace that has helped stabilize the U.S. economy and cut the unemployment rate in half since 2009.
As we have seen each month for the last few years, investors, media personnel, and analysts were quick to offer their interpretation of how these weak jobs numbers will impact the timing of the Fed’s interest rate hike. The May jobs report may temporarily lower overall sentiment in the economy but our economic and market outlook remains positive. The Fed’s policy-making committee has its next three meetings scheduled for mid-June, late July and September. This jobs report is likely to put the Federal Reserve back into “wait and see” mode – which is a bit of a step backwards from the last two months when they have been trying to “talk” the bond market into raising the long end of the interest rate curve in order to take some pressure off of themselves in having to raise rates at the next meeting. Now it looks like they won’t be under very much pressure from critics to raise rates until later in the year. It now appears very unlikely that the Fed will raise rates in June due to the weak jobs numbers this month, as well as the downward revisions of March and April. Even though the 4.7% unemployment target is well within the Fed’s range for a rate hike, the drop in the number of people in the workforce should prompt the Fed to discount that otherwise attractive metric. A few weeks back, the futures market was pricing the likelihood of a June rate hike at a 34% probability. This morning, after the data was released, this probability dropped to 9%. The probability of a rate rise by September fell from about two-thirds, but remained at roughly 50/50 either way.
Other employment data is in contrast to the May jobs numbers. For instance, wage growth has been stronger than it has been in many years and jobless claims in recent weeks have been at their lowest levels since the 1970s. While it is true that the total number of new jobs we have created on a monthly basis thus for in 2016 has been disappointing, there have been a large number of encouraging economic signs over the past two months. Some of these include: the best existing home sales numbers in almost a decade, stronger than expected new home construction and solid consumer spending. The pace of economic growth for the first three months of the year was lower than we initially expected (due to the oil industry struggles) at approximately 1% but we expect that growth will pick up to a 2.5 percent annual rate in the second half of the year.
Current State of the U.S. Economy:
With six months to go until Election Day, voters are extremely anxious about the U.S. economy and their own financial future. The 2008 financial crisis will be exploited by the politicians as they try to connect with voter’s fears. The biggest factor that has prevented the U.S. economy from recovering at a stronger pace is that consumers and business confidence has not fully recovered and many people are still afraid that the U.S. could fall back into another economic meltdown even though most of them now have jobs and things are looking up economically. The reason for this is “uncertainty” – with regulations, the election and all the noise that the media produces as they have morphed into trying to “make” the news rather than “report” the news. The media ratings go up when they are covering economic or stock market stories that create fear, so the negative data gets 2 times more coverage than positive data and that impacts confidence also.
So how is the U.S. economy really doing?
The U.S. is in a lot better place than it was eight years ago in the Great Recession. But the economy is definitely not back at full force yet. It’s growing at about 2% a year, less than the historic average of over 3%. Residential construction and business spending both need to continue to improve to help the economy get back to full growth mode.
The next president could do a lot to boost growth if they can get Congress to act. One good thing about the Trump and Sanders swell of support is that the current “establishment” on both sides in Washington may be held accountable by voters in the near future for their failure to get anything done. Both candidates have outlined their main drivers of economic growth and they include:
- Corporate tax reform:
Our tax system is extremely uncompetitive internationally. This is what is motivating so many U.S. businesses to move overseas in order to lower their tax bills. The top marginal U.S. corporate tax rate is 39%. The next highest rate in the west is France with a 34.4% top corporate rate, according to the Tax Foundation. The worldwide average is under 23%. On top of that, the U.S. has a very complex system of credits and deductions that make tax reporting incredibly difficult. Lowering tax rates is probably the fastest short-term boost we could deliver for the economy. Corporate tax reform also has the greatest opportunity for bipartisan support next year.
- Reduce uncertainty & build confidence:
Uncertainty is one of the reasons that businesses aren’t investing. Business owners do not want to put their money on the line when they are highly unsure what the rules are going to be in the near future. At the moment, there’s a lot up in the air about what will happen with Obamacare, taxes, trade deals, and the Federal Reserve’s interest rate decisions. That’s on top of one of the most unpredictable presidential elections in modern U.S. history. Businesses are reacting by not taking any big risks and just sitting on near record piles of cash. The election results in and of themselves will reduce some uncertainty, but that’s only the first step.
- Infrastructure spending:
Congress has to put a real infrastructure bill together to rebuild our roads, bridges, dams, power lines, etc. Study after study points out the aging infrastructure in need of repair just to be suitable for current business activity. And we need to keep making the investments our country needs to stay competitive globally, especially in technology. Our infrastructure is crumbling. Former Fed chair Ben Bernanke is one of many voices calling on Congress to boost spending – especially on infrastructure to create jobs, boost the economy and make the U.S. more competitive. There are other policies that could help beef up U.S. growth, such as better education for the high-tech economy, a better immigration system to prioritize what the country needs, and more trade deals, but infrastructure is a good place to start.
- Social Security, Medicare and Medicaid Reform:
The final item that appears on almost all economic wish lists is so-called entitlement reform. It means fixing Social Security and Medicare so they won’t go bankrupt or add severely to the national debt. There’s wide agreement that raising the age that people can receive benefits and raising taxes — or some combination of both of those — will be necessary. The framework for a solution exists, but so far, the political will to act does not. Addressing this won’t boost growth overnight, but it will set America up on a much stronger financial path for years to come.
Tips for Recent College Graduates:
With many young adults on their way out of school and into the working world, the wages of entry-level jobs provide little cushion to help with the student loan debts of these former students. For many of them, eyes are widened at the dollar figures going into their bank account from a newly-steady paycheck. But few think about the new expenses that are being handed to them. Car payments, insurance, loans, rent, and bills are only a few to account for. Being financially disciplined can pay big dividends in the long-run. Here are a few tips for recent college graduates to keep on their feet and keep money in their pocket over the long-haul:
- Make a budget – Everyone should have a budget, whether you’re a retiree or a broke college student. A budget is the simplest and most effective method to calculate leftover money you have after expenses and how you may utilize these excess funds. For many recent graduates, a good budgetary goal to have is to “keep living like a student”. Determine what expenses are necessary and fixed, and what variable expenses you need to save for as well. If necessary, one option (that can often be scoffed at when suggested) is going to live at home for a year or two after college to establish some savings. Even if parents charge their children a minimal amount if he/she would return after college, the rent paid to them would be much less than rent paid to another landlord. Bottom line, add up the outflows and compare to the inflows.
- Save for retirement now – Many companies offer some sort of retirement plan, oftentimes a 401(k), which can be overlooked by many 20-somethings with the thought of, “I’ll be working for at least forty more years. I can save later.” But making a tax-deductible contribution to allow your money to grow tax-deferred for those forty years can pay off big time. Also, your employer might have a 401k match program, matching a certain amount of what you put into your 401k, which encourages contributing to your retirement fund just a little more. Taking advantage of that is highly suggested—it’s essentially free money. Allocate some money every month into a retirement account and give it a chance to accumulate.
- Manage debt and build credit – Obviously many newly-dubbed workers are fresh off of campus, meaning they’re bringing large amount of school debt with them. It’s important to know how to manage the almost-inevitable debt that’s mounting interest every day. A couple of suggested methods to rid yourself of debt while accumulating the least amount of interest possible are to either pay off the smallest loans first, or pay off the loans with the highest interest rates first. Paying off smaller loans eliminates them altogether, along with the possibility of accumulating interest on those loans, making your debt seem more manageable. The better option being paying off loans with the highest rates first, keeping interest at a minimum and only allowing the loans with lower rates to have a longer amount of time to amass interest. This includes credit card debt. Managing debt is one of the most important tasks to learn how to do effectively out of college because it can save you a lot of money, and even more headaches.
- Get insurance – Health insurance is vital to hold no matter your age or your health condition. The number one cause for bankruptcy is a medical emergency. For recent college graduates, under the Affordable Care Act anyone is allowed to be covered under a guardian’s health insurance plan until age 26. Many jobs will offer some sort of health insurance as well as disability and life (along with others), and it’s recommended to take advantage of those benefits. Renters and liability insurance are also recommended.
- Splurge a bit – While it’s important to be smart with your newly-earned paycheck, it’s also just as important to remember that money shouldn’t form limitations and boundaries on your life. Like many people say, “You can’t take your money with you when you go.” If you sit in your home or office all day every day, there aren’t opportunities to experience new things and have new stories to tell. So don’t be afraid to have some fun, just remember to live within your means and keep track of those splurges too.
Many college graduates are on their way to begin their careers. And while it’s an exceptional accomplishment to get a good-compensating job, there are still many commitments, bills, and payments to make that you may not have even thought of yet. So as long as you’re remaining keen to the things you’re spending money on and taking note of ways to save and plan for the future, have a little fun. After all, you can’t take your money with you.
This publication is provided as a service to our clients and associates of PFA solely for their own use and information. The material is derived from sources believed to be reliable but its accuracy and the opinions based thereon are not guaranteed and have not been verified. The content in this publication is for general information only and not intended to serve as individual investment advice. You should seek independent advice from a professional based on your individual circumstances.