Published On: Sat, Jun 3rd, 2017

All that ‘animal spirits’ talk for the economy seems like a long time ago now

May’s disappointing job growth delivered another blow to hopes that the U.S. economy is on the cusp of breaking out.

Job creation fell well short of economist expectations, with just 138,000 new positions created against estimates for 185,000. The unemployment rate declined to a 16-year low of 4.3 percent, but that was because of a drop in the labor force participation rate.

More broadly, though, the numbers serve as a reminder that hopes for breakout growth this year are likely to be dashed, and in fairly short order. As Washington lawmakers struggle to push through any aspects of President Donald Trump’s pro-growth agenda, the reality is sinking in that any gains now are likely to be felt in 2018 at least or perhaps even longer.

Talk of “animal spirits” in January and February — with their respective payroll gains of 216,000 and 232,000 — is now replaced with expectations for more of the same as 2017 plays out.

“It just seems as if lower employment gains in part are consistent with the demographics and labor force participation rates in the U.S.,” said John Silvia, chief economist at Wells Fargo. “I would suspect the days of 200,000 jobs per month are gone. We’re now dealing with 160,000 or 180,000 for the rest of the year, if we’re lucky.”

That’s not the way it was supposed to be, but it now appears the chatter earlier this year was misplaced.

“It was a head fake in the sense that some people believed that we were going to have a lot of economic policy actions early,” Silvia added. “It’s still legitimate to say that we’re going to have those policy actions that may affect 2018. But a lot of people built up too much optimism about how quickly economic policy gets through Washington.”

For its part, the Trump administration tried to put a happy face on the numbers Friday.

Gary Cohn, Trump’s chief economic advisor, told CNBC that he remains confident in the progress of the economy and said, “We have to create a better and better job market in the United States.” However, his bragging that the administration is “clearly bringing people back into the job force” is a little misleading.

Bull Pamplona Spain

Miguel Riopa | AFP | Getty Images

In fact, the labor force has increased by just 68,000 through the first five months, well below the 148,000 for the same period in 2016 and the 425,000 in 2015. Though the unemployment rate that includes discouraged and underemployed workers has dropped a full percentage point this year to 8.4 percent, the labor force and its composition remain a problem for broader economic growth.

“We expected the jobs market to take a slight breather, with 185,000 for May, but including the downward revisions the month before, this report feels more like an early summer vacation instead of a pause,” Beth Ann Bovino, chief U.S. economist at S&P Global Ratings, said in a note. “Given reports that job openings are near all-time highs, it suggests that businesses are struggling to fill these positions in an increasingly tighter market.”

Economists and Federal Reserve policymakers also remain baffled at the lack of positive inflation signs, in particular wage increases.

Average hourly earnings are rising at just a 2.5 percent pace — Deutsche Bank called it “the new 3 percent” — even though jobs seem harder to come by. Tightness in the labor market should be pushing harder on wages, but that does not appear to be the case.

The tepid wage pressures along with “further evidence of a still-modest consumer, restrained business investment, and tepid domestic manufacturing, undermines the notion of better conditions or a more robust economic picture lurking around the corner,” said Lindsey Piegza, chief economist at Stifel Fixed Income.