Previous posts (e.g. here) suggested that US GDP growth would remain sub-par in the second quarter while labour market data would soften in lagged response to earlier economic weakness, keeping the Federal Reserve on hold until September, at least. The weak May employment report released on Friday is consistent with this scenario.

While the small May payrolls rise partly reflected a strike at Verizon, other labour market indicators give little cause to expect an early significant rebound. Online help-wanted advertisements continued to decline in May, according to the Conference Board – see first chart. Temporary help jobs usually lead overall employment and fell in May – second chart.



Importantly, however, reduced hiring has yet to be accompanied by a pick-up in firing. Job cut announcements fell back sharply in May, according to Challenger, Gray and Christmas, while initial claims for unemployment insurance remain low – third chart. This reduces the risk of labour market weakness feeding back into a further economic slowdown.


The view here remains that the winter 2015 / spring 2016 “soft patch” is coming to an end and GDP growth will rebound significantly during the second half, with labour market conditions following with a lag. This rests primarily on a pick-up in real (i.e. inflation-adjusted) narrow money* since late 2015. Six-month growth of real narrow money reached a 14-month high in April and is estimated to have remained at this level last month, based on weekly data through 23 May. It has consistently led GDP growth turning points in recent years – fourth chart.


The positive monetary signal is receiving confirmation from the OECD’s composite leading indicator. Six-month and one-month changes in the indicator strengthened further in April, according to calculations here – fifth chart. The components of the indicator are: housing permits, new orders for durable goods, consumer sentiment, manufacturing weekly hours, the ISM manufacturing purchasing managers’ index (PMI), share prices and the spread between long- and short-term government bond yields. The recent upturn reflects recoveries in new orders, the PMI, weekly hours and share prices.


*M1A deflated by consumer prices. M1A = currency plus demand deposits.