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Another Warning Light For America


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What's going on?

Fewer jobs were created in America in May than economists expected – another sign that the US economy is likely losing momentum. (tweet this)

What does this mean?

While the American economy is still adding lots of jobs (138,000 in May), the overall pace of job growth has slowed relative to last year. To some extent this should not be surprising: after particularly strong job growth in the past few years, a slowing growth rate is probably natural. However, the slower pace of hiring could be indicative of the overall economy growing at a slower pace as well.

Why should I care?

For markets: Stocks don’t seem to care!

Despite the disappointing economic data, US stocks (as well as those in the UK) hit a new record high on Friday. Meanwhile, US bonds also jumped in price. Typically, a weaker economy means that the US Federal Reserve is less likely to increase its target interest rate (because doing so makes it more expensive to borrow money, which tends to slow growth further). And as investors’ expectations for interest rates go down, it’s usually a positive for bonds and, often, stocks (read more here). The elephant in the room is if the economy is weakening much more than currently expected, which would probably be more damaging for the stock market.

The bigger picture
: Whether this will stoke inflation is a big question – globally.

Various countries have experienced strong job growth over the past few years, including the US and UK. Curiously, however, wage growth isn’t picking up markedly (wages should go up in a strengthening job market as firms compete to attract workers). As long as wage growth is subdued, it’s much more likely that inflation in the overall economy will be low (that makes sense: if people were paid more, they’d spend more, thus allowing companies to raise prices). Eventually, wages should pick up as job growth continues and, in turn, push up inflation – but it’s just not happening so far.

Originally posted as part of the Finimize daily email.

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