The American labor market showed improved signs of life in May, adding 559,000 jobs along with an upward revision to the April figure of 27,000 jobs, putting it at 586,000.
In many respects, May’s overall jobs gain is a Goldilocks number—not too hot and not too cold.
In many respects, this is a Goldilocks number—not too hot and not too cold—which should provide some relief to concerns that the economy could overheat and cause sustained inflation.
In fact, inside the data, wages increased 2.9% on a three-month average annualized pace, which is both encouraging and sustainable and not indicative of the type of wage push inflation that is a prerequisite for permanent increases in prices.
Despite a decline in the unemployment rate to 5.8%, wage growth increased by 0.5% on the month and 2% on a year-ago basis.
Smoothing, seasonality and the data
We would suggest that policymakers and investors look past the top-line number and instead use the smoothed three-month moving average to see the true underlying trend in hiring. Under this metric, jobs gains are advancing at a robust clip of 540,667 a month, which is modestly below our forecast of a 675,000-per-month average for the year.
There was some evidence of seasonality in the data like the kind we observed in April. In May, it looked as if the Bureau of Labor Statistics made a seasonal adjustment of 973,000 to the data to account for seasonal quirks and the end of the school year, which likely dampened the top-line estimate.
Over the past five years, the bureau has made an adjustment of 661,000 to account for these seasonal quirks, which underscores our conjecture that the April and May data may be underestimating the underlying strength in the labor market as the economy reopens.
Policy considerations
The major policy takeaway from the May employment report is twofold:
First, the idea that unemployment benefits are serving as a barrier to re-entry in the labor market suffered a major blow. Job gains of 292,000 in the leisure and hospitality sector in May and 1.24 million over the first five months of the year imply that such arguments are not tethered to empirical reality and have more to do with the politics of the Biden administration’s first year than an objective assessment of the data.
The job gains have been robust in those sectors with the lowest pay.
Put simply, if that assertion was true, one would not be observing such jobs gains in the sectors with the lowest pay. For example, roughly two-thirds of the job gains in the leisure and hospitality component in May occurred in food and beverages, which underscores our doubts about claims that the special supplemental jobless benefit is inhibiting rising employment.
The next acid test of that claim will take place in the 25 states that are ending the special $300 weekly supplemental unemployment benefit. We will be able to determine if the elimination of that federal benefit—which is scheduled to expire in September nationally—results in a decline in state unemployment rates.
For much of the past year, that one-time jobless benefit has ranged from $300 to $600 while the unemployment rate declined sharply, so the hurdle for those making the case that it deters employment is quite high. In addition, the removal of that benefit simply penalizes those at the bottom of the income ladder who have borne the brunt of job losses during the pandemic, and it denies the economic benefits to those states and localities that benefit from spending associated with those payments.
Second, this data provides some relief to those at the Federal Reserve who argue that the economy is not at risk of overheating, the economy is not about to experience a debilitating bout of inflation and there is no need to begin tapering operations immediately.
But there is a growing chorus of Federal Reserve policymakers who are preparing both the public and investors for a discussion around a gradual and orderly pullback, or change in composition, of its $120 billion per month in asset purchases. Those purchases include $80 billion in Treasury bonds and $40 billion in mortgage-backed securities.
While there is no hurry at the central bank to start this pullback, known as tapering operations, the economy will in all probability move from recovery to expansion this quarter. It is appropriate that the Fed begin to talk openly about its exit from pandemic-era policy operations. We expect that discussion will start at either the Kansas City Fed’s annual symposium on monetary policy in Jackson Hole, Wyo., in August, or at the September meeting of the Federal Open Market Committee.
Detail in the data
The detail of Friday’s jobs report suggests that service sector hiring is accelerating, with a gain of 489,000 jobs. Yet in construction, price increases for raw materials and the cessation of activity resulted in a decline of 20,000 jobs.
The revival of hiring in leisure and hospitality is the major narrative within the jobs data this year.
The revival of hiring in leisure and hospitality is the major narrative within the jobs data this year, and the gain of 292,000 jobs in that sector only underscores that point. The trade and transport sector added 37,000 jobs on the month, information 29,000, business services 35,000, and the education and health sector 87,000.
In residential construction, we think that price volatility around basic inputs like lumber has resulted in some contractors postponing projects until prices stabilize. That led to the monthly decline in hiring and the tepid overall gain of 43,000 jobs so far this year.
Other than construction, there were 23,000 manufacturing jobs added to total employment on the month and 3,000 goods-producing jobs. According to the Bureau of Labor Statistics, a job gain in motor vehicles and parts (up by 25,000) followed a loss in April (down by 38,000). Employment in manufacturing is down by 509,000 from its level in February 2020.
The number of people on temporary layoff declined by 291,000, to 1.8 million. That is down from the high of 18 million in April 2020.The number of permanent job losses fell by 295,000 to 3.2 million and is 1.9 million higher than in February 2020, just before the pandemic.
The labor force participation rate was essentially unchanged at 61.6% and the employment-to-population ratio stands at 58%. Those employed part time for economic reasons stands at 5.3 million, which is 873,000 higher than in February 2020.
The economy remains roughly 7.6 million jobs below where it stood before the pandemic, and once one adjusts for population growth, the economy needs to generate 10 million new jobs to return to full employment.
Pandemic employment report
The BLS reported that In May, 7.9 million people said that they had been unable to work because their employer closed or lost business because of the pandemic—that is, they did not work at all or worked fewer hours at some point in the last four weeks because of the pandemic. This measure is down from 9.4 million in April.
Among those who reported in May that they were unable to work because of pandemic-related closures or lost business, 9.3% received at least some pay from their employer for the hours not worked, which is unchanged from the previous month. Among those not in the labor force in May, 2.5 million people were prevented from looking for work because of the pandemic. This measure is down from 2.8 million the month before.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
