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Portfolio Update

Sticking with Our Hedges

By Elliott H. Gue, on Jun. 7, 2016

Last week’s jobs report underscored two points that we’ve made since mid-2015: The Federal Reserve will struggle to raise interest rates this year; and the tightening cycle that began in December 2015 will occur at a halting pace relative to past periods of rising interest rates.

Disappointing jobs data suggest that the US economy continues to lose steam. The Bureau of Labor Statistics (BLS) reported that the US created 38,000 jobs last month—considerably short of the consensus expectation for 160,000 payroll additions.

To worsen matters, the BLS also lowered its estimated payroll gains for March and April by 59,000 positions, suggesting that the labor market wasn’t as healthy as previously thought.

After these revisions, the US added an average of 116,000 jobs in each of the past three months, compared with 282,000 positions in the final three months of 2015 and a monthly average of 229,000 payroll additions for 2015 as a whole. Bottom Line: The pace of job creation has slowed.

A deeper dive into the most recent employment data reveals further signs of trouble

The one-month diffusion index adds the percentage of the 282 industries tracked by the BLS that created jobs last month to half the percentage of industries where employment levels remained flat. Index readings above 50 suggest that more industries have added to their payrolls than those that let go workers.

Last month, this diffusion index slipped to 51.3—its lowest reading since February 2010. The steady decline in this indicator, which often leads payroll data, doesn’t bode well for future employment reports.

Meanwhile, underemployment remains a problem. The number of employees who worked part time because they couldn’t find a full-time job surged to 6.43 million in May 2015, up from 5.962 million in April. Uncertainty about the US economy’s future may have prompted many employers to opt for part-time help instead of full-time employees that entail higher expenses.

Finally, the number of workers employed by temporary staffing companies tumbled to 2.88 million, down from 2.901 million in April and a multiyear high of 2.9441 million in December 2015. Why does this matter? Temp workers are often the first to be laid off when the economy starts to slow.

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