Fed Chair Janet Yellen. Susan Walsh/AP The jobs report was bad.

Last Friday, the week's big headline event was a stinker, with the May jobs report showing the US economy added just 38,000 jobs in the year's fifth month, way less than expected.

The BLS noted in its report that a negative impact of 34,000 jobs was felt by the Verizon strike that was in place during the reference week for the report, but even adding these numbers back, it was a bad number.

The two upshots here are that we're once again hearing folks who are more bearish on the US economy speak up a little louder, and any hope there might've been for the Federal Reserve to raise interest rates later this month or next month went out the window.

This week will be a quieter one for US economic data, with the biggest event taking place Monday as Fed Chair Janet Yellen will speak in Philadelphia before the Fed enters its pre-FOMC meeting blackout period.

Top Stories

Jobs report disappoints. In May, the US economy added 38,000 jobs, less than the 160,000 that was expected. The unemployment rate fell to 4.7%, a post-crisis low, though this came as the labor force participation rate also declined. So we had fewer unemployed because there were fewer people in the labor force. Wages still grew 2.5% over the prior year and so far this year wages are up about 3.2% year-on-year, according to Neil Dutta at Renaissance Macro. On the surface, this is a bad report and it likely does enough to keep the Fed on hold through the summer. Future revisions could make this look like a better number — recall the 34,000 workers taken from the information sector due to the Verizon strike — but the instant post-report narrative that we now ought to be on the lookout for a slowing US economy will likely stick for some time.

In May, the US economy added 38,000 jobs, less than the 160,000 that was expected. The unemployment rate fell to 4.7%, a post-crisis low, though this came as the labor force participation rate also declined. So we had fewer unemployed because there were fewer people in the labor force. Wages still grew 2.5% over the prior year and so far this year wages are up about 3.2% year-on-year, according to Neil Dutta at Renaissance Macro. On the surface, this is a bad report and it likely does enough to keep the Fed on hold through the summer. Future revisions could make this look like a better number — recall the 34,000 workers taken from the information sector due to the Verizon strike — but the instant post-report narrative that we now ought to be on the lookout for a slowing US economy will likely stick for some time. Services slowed. Two of the most closely-watched economic indicators each month are the Institute for Supply Management's manufacturing and non-manufacturing purchasing managers' index, or PMI. The manufacturing number has been soft over the last year or so as the decline in the price of oil has dented the sector. Of course, many are quick to point out that manufacturing accounts for just about 15% of GDP. The services sector, on the other hand, accounts for the vast majority of GDP growth (something near 80%) and as a result the non-manufacturing report gets a closer look. On Friday, ISM's non-manufacturing PMI fell to 52.9, the second-lowest reading since 2010 and a continued indication that the biggest part of the US economy continues to grow at a slower pace. (Any reading over 50 on these reports indicates expansion; below indicates contraction.)



Following Friday's ISM number, Ian Shepherdson at Pantheon Macroeconomics said the number was "surprisingly grim." Bricklin Dwyer, an economist at BNP Paribas, added that, "The weakness on the non-manufacturing side of the economy is consistent with our view that we should expect a slow pace of economic activity ahead."



Inside the report, however, there were indications that the cost of labor was increasing while the supply was running short. A slowing of payroll gains while the cost of adding or maintaining payroll levels is what we see in the later side of an economic cycle, which almost no one would deny we're either near or in right now. And this presents a conundrum of sorts for the US economy and its workers. Labor getting more expensive means current workers will get paid more. This is good. But an increasing cost of labor — and perhaps more significantly, a shortage of labor — could lead firms to either cutback on employees or elect not to expand if the process of hiring becomes too onerous. The business cycle is a funny thing: what was once good becomes bad and so on. And while it's been longer than average since we've seen a full cycle unfold, recent data suggest we haven't fully smoothed this process yet.

Economic Calendar

Nonfarm productivity and unit labor costs (Tues.): Nonfarm productivity is expected to fall 0.6% in the first quarter of the year, less than the 1% decline previously reported. Unit labor costs, in turn, are expected to rise 4% in Q1, a bit less than the 4.1% previously reported. Productivity and labor costs have become more closely watched in recent years as the seemingly ever-declining productivity among US workers has gotten increased attention from the economics establishment, particularly in the wake of ideas like "secular stagnation" being re-popularized.

Nonfarm productivity is expected to fall 0.6% in the first quarter of the year, less than the 1% decline previously reported. Unit labor costs, in turn, are expected to rise 4% in Q1, a bit less than the 4.1% previously reported. Productivity and labor costs have become more closely watched in recent years as the seemingly ever-declining productivity among US workers has gotten increased attention from the economics establishment, particularly in the wake of ideas like "secular stagnation" being re-popularized. Consumer credit (Tues.): Consumer credit balances are expected to rise by $18 billion in April, less than the $27.7 billion expansion that was seen in March.

Consumer credit balances are expected to rise by $18 billion in April, less than the $27.7 billion expansion that was seen in March. JOLTS (Weds.): The April job openings and labor turnover survey, or JOLTS report, is expected to show there were 5.65 million jobs open in April, down from March's 5.757 million openings but still near a post-crisis high. This report, which is a favorite of Chair Yellen's, is a good overview of how dynamic the US labor market is or is not. Also in this report we'll get the quits rate, which is seen as a proxy for how confident workers are with the idea being you won't quit your job unless you're reasonably confidence you can get another one.

The April job openings and labor turnover survey, or JOLTS report, is expected to show there were 5.65 million jobs open in April, down from March's 5.757 million openings but still near a post-crisis high. This report, which is a favorite of Chair Yellen's, is a good overview of how dynamic the US labor market is or is not. Also in this report we'll get the quits rate, which is seen as a proxy for how confident workers are with the idea being you won't quit your job unless you're reasonably confidence you can get another one. Initial jobless claims (Thurs.): The weekly report on initial jobless claims should show new filings for unemployment insurance totaled 270,000 last week. This number has been under 300,000 for more than a year.

The weekly report on initial jobless claims should show new filings for unemployment insurance totaled 270,000 last week. This number has been under 300,000 for more than a year. Z.1 flow of funds (Thurs.): The Federal Reserve's quarterly flow of funds report, which gives an overview of household net worth, will be released Thursday and reflect changes during the first quarter of the year. The stock market volatility at the beginning of this year might seem like a distant memory, but the impact this action had on US household finances will show up in this report. In the fourth quarter of 2015, household net worth dropped by $1.63 trillion.

The Federal Reserve's quarterly flow of funds report, which gives an overview of household net worth, will be released Thursday and reflect changes during the first quarter of the year. The stock market volatility at the beginning of this year might seem like a distant memory, but the impact this action had on US household finances will show up in this report. In the fourth quarter of 2015, household net worth dropped by $1.63 trillion. University of Michigan consumer confidence (Fri.): The preliminary reading on consumer confidence in June will be released by the University of Michigan on Friday. Expectations are the report will show confidence slipped to 94.0 from May's final reading of 94.7.

Market Commentary

David Rosenberg is bearish.

Writing for Business Insider on Sunday, the legendary market strategist — now with Gluskin Sheff — outlines that all signs in the US economy look a lot like they did before prior recessions.

Here's Rosenberg (emphasis mine):

I don’t want to alarm anyone but the facts are the facts, and the fact here is simply that this is precisely the sort of rundown we saw in November 1969, May 1974, December 1979, October 1989, November 2000, and May 2007.

Each one of these periods presaged a recession just a few months later — the average being five months.

There was just one time, in the 1985/86 oil price collapse, that we had such a huge decline in goods-producing employment without a recession lurking around the corner — but the Fed was easing then and fiscal policy was a lot more accommodative than is the case today.

Not even the job slippage in goods-producing sectors during the 1995 soft landing and the 1998 Asian crisis were as severe as what we have had on our hands from February to May.

For such a long time, the service sector was hanging in but services ultimately service the part of the economy that actually makes things.

Private service sector job gains have throttled back big-time — from +222,000 in February to +167,000 in March to 130,000 in April to +25,000 in May (ratified by the non-manufacturing ISM as the jobs index sagged to 49.7 in May from 53 in April — tied for the second weakest reading of the past five years).

Once again, a discernible pattern here, but it is where the slowdown is taking place that is most disturbing.

More than one-third of the weakening we saw in the private services sector came in temp-agency employment where employment shrunk 21,000 in May, down now in four of the past five months and by a cumulative 64,000, which is a losing streak we have not seen since August 2009.

In fact, this type of weakness over such a stretch, again not to sound like an alarmist, occurred just prior to economic recessions in the past, without exception and with no "head fakes."

Yes, it typically is not good news when the headhunters are the ones to start chopping off heads — this is a leading indicator. So I may not want to sound alarmist, but the answer is yes … I am worried.

Read Rosenberg's full commentary here »