We expect total employment to increase by 615,000 jobs when the employment report for May is released on Friday, with the possibility of a strong month of growth because of diminished seasonal effects linked to the echo of the pandemic-induced collapse in employment last year.
As the unemployment rate falls to 5.8%, investors, firm managers and policymakers should anticipate that echo to wreak havoc with both estimates of total employment and their forecasts over the next few months. We strongly recommend that viewing the data over a smoothed three-month average will provide a more reasonable assessment of the quickly changing American labor market.
Seasonality and the data
Over the past five years, the average seasonal adjustment made by the Bureau of Labor Statistics to the May employment report during the first estimate has been 661,000—the seasonal adjustment for the final estimate is slightly higher at 638,400—which implies another major impact on the top-line number this year.
We strongly recommend viewing the jobs data over a smoothed three-month average.
But our estimation is that the impact linked to the seasonal adjustment will be somewhat muted this year, leading to a larger top-line increase in both the May and June jobs reports.
How does this work? The whole point of seasonal adjustments is to correct for quirks in the calendar such as the end of the school year. This quirk causes the number of workers—in this case, public-sector education employees, many of whom are women in their prime working years of 25 to 54—to temporarily decline. That decline, in turn, dampens the total change in employment.
But during the pandemic, reductions in employment were diminished as workers telecommuted and virtual learning exploded. For that reason, the seasonal fluctuation will be weaker and the seasonal adjustments by the Bureau of Labor Statistics could very well result in a larger increase in the top-line estimate than that implied by the current consensus forecast for May of a gain of 635,000 jobs.
In direct terms, the seasonal adjustments will result in far less job destruction than that implied by the five-year average. As a result, that will show strong job creation with the possibility of a much larger number than that implied by the RSM or consensus forecast.
Given that we think that the April number underestimated the true increase in total employment and that the May and June data will overstate the gains, it is probably best to view the data over a smoothed three- or six-month moving average to ascertain the true underlying trend.
We anticipate that the May and June jobs reports will be followed by another undershoot in August and September because of the undershoot in 2020 hiring for the very same reasons outlined above. It may not be until the end of the year before we get a better sense of the pace and intensity of improvement in the labor market.
The debate over federal jobless benefits
We anticipate a decline in the unemployment rate to 5.8% and growth in hours worked as firms in the manufacturing, construction and goods-producing sectors continue to find it challenging to find willing and able workers to fill current openings.
Growth in average hourly earnings should advance 0.2% on the month and 1.6% on a year-ago basis. In addition, we expect robust growth in the leisure and hospitality sector—where wages are so low that people might rationally choose to stay at home until their unemployment benefits expire over the next 90 days. That should result in an intensification of the debate over the efficacy of prematurely ending the supplemental $300 per week federal unemployment insurance benefit.
Given the fact that growth in that sector has averaged 316,666 jobs over the past three months, a simple continuation of that trend should be sufficient to put that story to rest. But we also acknowledge that empirical truths rarely get in the way of a juicy policy debate, so the May data should add fuel to the fire.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
