More cracks showing in U.S. economic expansion

San José, CA – More cracks showed up in the U.S. economic expansion as the May employment report saw a gain of only 75,000 net new jobs, less than half what most economists expected. In addition, the Labor Department revised the job creation numbers down by 75,000 for March and April. Over the last four months the economy has added new jobs at a rate of 130,000 per month, much less than the 223,000 new jobs added each month on average in 2018.

In addition to the weak jobs report, workers’ average hourly earnings gained only 3.1% over the last year, a slower rate that in April and March. Manufacturing worker jobs have gained only 5000 over the last three months as slowing car sales as well as Trump’s trade war weighed on factories. Gains in construction jobs also weakened, with a small gain of 4000 new jobs, despite lower mortgage interest rates that were expected to boost housing sales and construction.

More indications of a weaker economy also boosted the bond market. Demand for bonds, which is how governments and big businesses borrow, usually grows when more signs of a recession appear. As bond prices rose, interest rates fell again, maintaining the so-called ‘inverted yield curve’, where interest rates on longer-term bonds (typically those due in ten years) are less than interest rates on shorter-term bonds (such as 30 to 90 days). Typically, the interest rates on longer-term bonds are higher than shorter-term bonds because of greater chances of inflation. The inverted yield curve is one of the surest financial market signs of an oncoming recession.

There were also growing expectations that the Federal Reserve Bank will cut interest rates, perhaps as much as a half percentage point, this month or next month. This continued the party on Wall Street as stocks markets gained across the board on the hope that lower interest rates will boost profits for heavily indebted corporations. The fact that stock markets rose on signs of a weaker economy is just another example that stocks don’t represent the economy.

The stock market rally may prove to be a short-sighted view on the part of wealthy investors, as the last two times that the Federal Reserve cut interest rates, a recession began within three months in both 2001 and 2007. In both cases stocks ended lower a year after the first cut, as the growing recessions took its toll on corporate profits.