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U.S. Economy Sends Mixed Signals: Job Gains, but Soft Growth

June 5, 2017

Marcus Winbush, CFP® — CEO, True North Capital Alliance

The U.S. economy added 138,000 jobs in May—reducing unemployment to a 16-year low of 4.3%. That’s good news for job hunters, Federal Reserve policymakers, and others who look for signs that the labor market is tightening. However, the softness of recent economic growth continues to be a nagging though muted concern. These mixed signals will create the backdrop for the Fed as it prepares for the June 13-14 policy meeting at which members will decide, among other things, whether to raise rates and how to proceed with plans to shrink the Fed’s $4.5 trillion portfolio.

Key Takeaways from the May Jobs Report

The May jobs report released on June 2 showed moderate job gains in a labor market that is likely approaching “full” employment. In May, there were notable job gains in health care (+24,000), mining (+7,000), professional and business services (+38,000), and food services/drinking places (+30,000). Other major industries held steady.

On a down note, the labor participation rate (i.e., the number of Americans aged 16 or older working or actively looking for work) declined by 0.2% to 62.7%. According to the Bureau of Labor Statistics, the labor participation rate continues to be lower than historic norms: “After rising steadily for more than three decades, the overall labor participation peaked at 67.3% in early 2000 and subsequently fell to 62.7% by mid-2016.” Among other factors, the large cohort of aging/retiring baby boomers is a significant contributor to this decline.

Job gains reported in March and April were revised down by 66,000 based on data from subsequent government and business reports. Factoring in these adjustments, the labor market averaged gains of 121,000 per month over the past 3 months. Even with these revisions, Fed policymakers remain confident that the economy is on the right track and that gains averaging 100,000 jobs monthly are sufficient to accommodate people entering the workforce.

Average hourly earnings rose by 4 cents in May to $26.22; over the year, earnings have risen by 63 cents or 2.5%. Although lower unemployment is good news, workers may not be ecstatic because wages have grown ever so slowly during this recovery. However, it is generally believed that a continued tightening of the labor market will put pressure on employers to raise wages to compete for and retain skilled workers. Some employers are already reporting a shortage of skilled workers to fill openings, especially in construction and manufacturing.

Outlook for Near-Term Economic Growth

The other half of the equation that the Fed watches is the inflation rate. The Fed has deemed 2% inflation as the target needed to reflect healthy economic growth. When the Fed raised the federal funds rate in March, inflation was approaching the 2% target, but it has since backed off to around 1.5%. In the minutes of its April meeting, the Fed expressed the opinion that the slowdown in inflation was likely transitory; however, inflation has yet to rebound. The Wall Street Journal reported on an interview conducted Thursday with Dallas Fed President Robert Kaplan in which he stated the Fed’s take on inflation: “The most likely case is we’re going to see gradual, not rapid, but gradual increase in the inflation rate to our 2% objective over the medium term—over the next couple of years.”

On Balance … Fed’s Next Move?

Fed members continue to telegraph plans to increase the federal funds rate one or two more times this year—likely making the next move at their June policy meeting. Equally important to economists and analysts is having the Fed lay out a plan for shrinking its $4.5 trillion balance sheet, which includes bonds and other assets. The Fed stopped purchasing assets three years ago but has continued to reinvest the proceeds as assets mature, maintaining their balance.

Minneapolis Fed Chair Neel Kashkari has led the charge to define a detailed plan for reducing the balance sheet—even to the point of dissenting at the Fed’s March policy meeting. Reducing the balance sheet will be no small feat when you consider that the Fed’s balance sheet was less than $1 trillion at the start of 2008. However, the Fed is determined to signal its intentions well before the June meeting and to lay out a detailed plan for normalizing its policy regarding these holdings.

All in all, we expect a rate increase in June—likely a quarter of a percent, taking the federal funds rate to a range of 1% to 1.25%.


True North Capital Alliance is registered as an investment advisor with the states of Minnesota and Texas. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment advisor does not constitute an endorsement of the firm by securities regulators nor does it indicate that the advisor has attained a particular level of skill or ability.

Past performance is not a guarantee of future results.

All expressions of opinion are subject to change. This content is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

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