Job growth was stronger than expected in May, although figures may have been inflated a bit by the seasonal adjustment. Still, the strong job gains over the last year and the drop in gasoline prices have failed to boost consumer spending as anticipated. Following this week’s retail sales report, we may better understand why. This may have some impact on the outlook for monetary policy, but Fed officials will want to see a lot more economic data before pulling the trigger.
The estimate of nonfarm payrolls, which is subject to statistical noise and seasonal adjustment quirks, is often choppy from month to month. The underlying trend appears to have remained strong through May, although the separate ADP figures continue to suggest a slowing in hiring at large firms.
Consumers have been saving a substantial amount on gasoline expenditures this year. The mystery is why they haven’t spent as much of that “savings” as they have in the past. There are a couple of possible explanations.
One possibility is that consumers saw the drop in gasoline prices as temporary, in which case they would be less likely to spend the savings (that’s what the economic theory would suggest, although we’ve never seen much evidence of that historically). Another possibility is that added spending will show up with a lag, especially in the late spring and summer, when consumers generally spend more. It’s worth noting that the restaurant component of retail sales rose 9% y/y in the first four months of the year. Recent reports suggest that tourism is doing nicely as the travel season gets underway. Payrolls in leisure and hospitality rose sharply in April and May.
Federal Reserve governors have been clear. Monetary policy moves will be data dependent. Officials want to see further improvement in the job market and be reasonably confident that inflation will move back to the 2% target. There may be liquidity concerns in the bond market and potential turmoil in emerging markets as the Fed begins to tighten – so the Fed will keep a close eye on financial conditions. The pace of tightening after the initial move is expected to be very gradual.
