May Payrolls Were Exceptionally Weak



May payrolls disappoint

In May 2016, non-farm payrolls rose by 38,000. Non-farm payrolls missed Wall Street analysts’ estimate of 160,000 by a wide margin. The monthly ADP National Employment Report predicted that the number would come in at 173,000. Note that ADP numbers are meant to forecast the final payroll number, not the advance number. There was some noise in the number related to the Verizon strike, which potentially depressed payrolls by 35,000. That said, it was a putrid number, and with the two-month revision of -59,000, stock and bond investors quickly discounted the chance of a rate hike at the June FOMC meeting next week.

Private payrolls rose by 25,000 and government jobs rose by 13,000. Private services payrolls rose by 61,000 and manufacturing employment fell by 36,000. Construction employment fell as well after a strong start to the year.

Health and social services employment continued to see the most growth, driven by aging Baby Boomers. Professional and business services employment added 10,000 jobs while mining continued its streak of negative job growth. The strong dollar wreaked havoc on commodity prices.

Bonds rallied on the report with the ten-year yield falling 15 basis points to 1.7%. The two-year bond yield fell by 11 basis points. Investors interested in making directional bets on interest rates might take a look at the iShares Barclays 20+ Year Treasury Bond ETF (TLT).

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Why aren’t builders adding inventory?

Currently, there is strong demand for housing, yet builders aren’t adding inventory the way they typically do coming out of a recession. This could be due to the fact that they are being overly cautious, or it could be other factors. The most often cited reasons include high raw land prices, difficulties in finding skilled labor, and regulations that make starter homes unaffordable for young families.

Recent reports suggest that first-time homebuyers are making a comeback. This trend is good news for builders such as PulteGroup (PHM) and D.R. Horton (DHI), as they have a big focus on entry-level housing.

Luxury rentals remain a big growth factor for Toll Brothers (TOL), although there seems to be a lot of foreign money piling into that sector since it’s a dollar play as well as a real estate play. We’ll hear from Lennar (LEN) and KB Home (KBH) later this month.

Investors interested in trading in the homebuilding sector as a whole may want to look into the SPDR S&P Homebuilders ETF (XHB) or the iShares US Home Construction ETF (ITB).


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