Federal Reserve Chair Janet Yellen was upbeat on Monday in a speech at The World Affairs Council, where she largely dismissed the negative implications of Friday’s jobs report, which showed that the U.S. economy added just 38,000 new jobs, the worst monthly reading in nearly six years.
Yellen argued that while the disappointing report “bears close watching,” she maintained that “positive economic forces have outweighed the negative,” and that she expects that “further gradual increases in the federal funds rate are likely to be appropriate” in the coming months.
We won’t know until next week’s Federal Open Market Committee meeting how the sharp pullback in job growth affected the official Fed view of the economy, but Yellen’s speech suggests that she will make the case to her colleagues that not all that much has changed. After all, new applications for jobless benefits are at historically low levels, while the rate at which workers are quitting their jobs—usually a sign of worker confidence and labor-market strength—have reached pre-recession levels.
But what if these data are lulling the Fed into a false sense of security? Sure, businesses are not firing many people, but they’ve also cut back significantly on hiring and other expenditures, suggesting that confidence has declined considerably. Here are three charts that should have Yellen and the Fed thinking twice about raising interest rates this summer.
The rate of job creation is falling fast
The most disturbing part of Friday’s jobs report is not that the headline number was as low as it was, but that revisions to previous month’s estimates were revised downward to the point that there is now a clear trend of slowing job growth in the American economy.
Businesses aren’t investing in capital equipment, either
The decline in companies’ willingness to invest in people is matched by its lack of interest in investing in new capital equipment. This type of investment is essential to increasing worker productivity, and it offers a key signal of corporate confidence in its ability to increase profits.
ISM data corroborates payroll weakness
The payroll data coming from the Census Bureau is not only warning sign we’re seeing. Data from the Institute for Supply Management released Friday showed the growth in the services sector slowing in May, with the employment component falling into contractionary territory.
Yellen likely felt the need to not spook markets with an overly dour speech on Monday. But make no mistake about it, economic data released over the past week is beginning to paint a much bleaker picture of the U.S. economy than what we were seeing even just a month ago.