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Why May’s ‘Bombshell’ Jobs Report Isn’t As Bad As it Seems

Friday’s jobs report capped a heavy week of economic data. But while the headlines were bad, particularly the employment numbers, the economic news overall was not as terrible as it seemed.

First of all the bad: The U.S. economy did create just 38,000 jobs in May, the lowest tally since September 2010. Even excluding the impact of the Verizon (VZ) strike, which subtracted about 35,000 jobs, the payroll numbers were pretty lousy, badly missed the consensus of 155,000 and far below even the most bearish forecasts. Donald Trump called it a “bombshell.” Furthermore, payrolls for March and April were revised lower by a combined 59,000.

Rubbing salt in the economic wound, the labor force participation rate dropped 0.2 percentage points to 62.6%, the lowest level of the year. The number of American’s working part time because they can’t find full-time jobs increased by 468,000 to 6.4 million.

Even the unemployment rate dropping to 4.7%, the lowest since November 2007, was negative as the fall was due largely to Americans leaving the labor force vs. actually being employed.

The dollar fell sharply in reaction to the jobs news, which dampened prospects for a Fed rate hike at their meeting on June 14-15. U.S. stocks dropped in reaction but not dramatically.

“Before this disappointing jobs report, Federal Reserve officials had made it quite clear that an interest rate hike was likely coming soon,” writes Mark Hamrick, Bankrate.com’s senior economic analyst. “This makes what was already seen as an unlikely June rate increase even more remote. The nightmare for FOMC members is that the inevitable economic downturn arrives and they have little room to edge benchmark rates lower in response.”

Earlier in the week, econo-skeptics were already seizing on weaker-than-expected U.S. May auto sales, a surprising decline in the Conference Board’s consumer confidence survey, and steep drops in construction spending as well as Chicago’s Purchasing Managers Survey. Now they have another strong talking point.

What’s more, the news from overseas was particularly bad, with the OECD warning the global economy has fallen into a “low-growth trap” due to poor government policymaking in much of the developed world. Citing the need for “urgent action,” the OECD downgraded its forecast for global growth for both 2016 and 2017.

Meanwhile, J.P. Morgan’s Markit Global Manufacturing PMI showed “broad stagnation” in May, with notably weakness in China, Japan, and South America.

“The May PMI data suggest that the global manufacturing sector remains in a low gear,” said David Hensley, director of global economic coordination at J.P.Morgan.

Finally, polls show the upcoming ‘Brexit’ vote over whether Great Britain stays in the EU is going to be close, raising the risk of a black swan-type event in Europe, which represents 25% of the global economy.

But the news wasn’t all bad.

On the sunny side of the ledger, U.S. durable goods orders jumped 3.4% in April vs. forecasts for a gain of just 0.5%. In addition, Tuesday’s personal income and spending data featured the biggest monthly increase in spending since August 2009, when the so-called Cash for Clunkers program spurred auto sales.

And Friday’s otherwise dismal jobs numbers showed wages up 2.5% vs. a year ago; not gangbuster growth but an improvement nonetheless. American’s disposable income, or income after taxes, is up 3.3% in the past year and has been rising steadily in recent years.

This week also brought robust news on the housing front, with new home sales posting their strongest month in over eight years while the S&P/Case-Shiller Index rose 5.4% and is now back to within 4% of its 2006 peak.

Meanwhile, the S&P 500 closed at a 7-month high on Thursday and is within spitting distance of its all-time high. On Friday, the index fell nearly 15 points to just over 2,090.

Related: Here’s Why the Market Has Been Going Nowhere Fast

Bottom line: It’s not all gloom and doom, despite Friday’s jobs numbers and the prevailing sense of economic anxiety that has helped propel Donald Trump to the Republican nomination and kept Bernie Sanders’ campaign alive on the Democratic side.

So how to make sense of these seemingly contradictory indicators?

Earlier this year, James Paulsen, chief investment strategist at Wells Capital Management, described the market as being “characterized not by a bull nor by a bear, but rather by a bunny”jumping around in a skittish fashion and ultimately not moving a whole lot in either direction.

I don’t know about you, but when I hear “bunny” I think of Bugs Bunny and, to borrow from Mr. Paulsen, I think it’s fair to say this market—indeed the entire economy—has a bad case of rabbititis.

This malady helps explain why even the smartest hedge fund managers are struggling, and why retail investors are hesitant to dive into a market that is within earshot of record levels. When the old playbook isn’t working, there’s no sin in playing it ‘safe’–or at least more conservatively. That’s a big reason dividend paying stocks like utilities and gold are far outpacing the Dow Industrials, S&P 500, Nasdaq, small caps, mid-caps and pretty much everything else so far this year.