A Rude Jobs Interruption

The labor market finally catches up with slower economic growth.

President Obama’s election-year campaign to make Americans feel great about the economy again was rudely interrupted Friday by the reality of the job market. The economy created a dismal 38,000 net new jobs in May, the worst monthly performance since 2010. Who are you going to believe: The President or the Bureau of Labor Statistics?

The lousy numbers surprised most economists, including those at the Federal Reserve who have been talking up a tight labor market and hinting at another interest-rate increase or two. The unemployment rate has been falling—it fell again in May to 4.7%—but maybe that’s because millions of people have left the job market in frustration.

The jobless rate declined largely because the labor force fell by some 458,000 in May. As for those still in the labor force, the number working part-time who would prefer to have full-time work but can’t find it increased by 468,000.

The nearby chart shows the trend in labor participation since the recession began at the end of 2007 when it was 66%. In February 2009 when Mr. Obama first visited Elkhart, Indiana as President to tout his economic stimulus, the rate was 65.8%. The astonishing reality is that this rate has continued to decline for most of this economic expansion. The last time the rate was steadily below 63% was 1977.

One likely explanation for the May slide is that the job market is finally catching up with the slowdown in overall growth. The U.S. economy clearly downshifted last fall from its 2%-2.5% range of the last few years, and it barely skirted recession through the end of 2015 and the first quarter of this year.

Labor markets are a lagging indicator, and the jobs slump may now reflect that slower growth.

The net jobs numbers were revised down for March and April by 59,000, and the average job creation across the last three months is 116,000. That’s a significant decline from the 200,000-plus average of the last few years. Fewer Americans were working in May than in February, and average weekly hours worked haven’t budged.

None of this presages an immediate recession, but it does raise the question of whether this already long expansion is nearing the end of its tether. The manufacturing economy has arguably been in recession for some time, and on Friday the ISM non-manufacturing index fell to 52.9 from 55.7 in April. Below 50 signals a contraction, so this is more evidence of a growth downshift.

Wages have finally begun to rise in the last year, albeit at a pace still slow (2.5%) for this stage of an expansion. Compensation is climbing as a share of national income, which is encouraging for worker well-being and consumer spending.

But because the economy is growing so slowly and business revenues therefore rise slowly, these wage gains are coming out of corporate profits. That hurts future business investment, which means slower future growth. The bottom line is that there’s little reason to suspect a sustained economic re-acceleration.

This puts added pressure on the Fed, which wants to believe it can finally start returning to more normal monetary policy but has been over-estimating economic growth every year of this expansion. Look for the liberal pundits to start yelling about a Fed “mistake” if it does raise rates in June or July.

Which brings us back to Mr. Obama’s magical economic recovery tour. He kicked it off this week with a return to Elkhart, Indiana, where he touted the area’s 4% jobless rate as the recreational-vehicle industry has recovered. He knows his legacy is on the line in November, and he can read the polls that show that Donald Trump is leading Hillary Clinton on who would do better for the economy.

Thus his economic pep talk and attempt to rebut what he called “myths” spread by Republicans and the “conservative” media about slow growth and mediocre incomes. But he doesn’t need to blame us. His bigger beef is with Mrs. Clinton and Bernie Sanders, who have spent the last year deploring the economic condition of America’s middle class. And as of Friday with his own Labor Department, which reported facts that are hard even for this President to spin away.

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