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Labor Market Shows Signs of Life in May

Scott Anderson
Chief Economist

The May Employment Report released this morning from the Bureau of Labor Statistics captured more of the economic reopening than we expected, allowing for a surprising 2.51 million gain in nonfarm payrolls and a drop in the unemployment rate to 13.3% from 14.7% in April.

We had forecast an unemployment rate of 20.5% for May, and today’s far lower reading suggests a faster road to recovery for the U.S. economy.

The U.S. unemployment rate likely peaked in April at 14.7% and we expect further declines in the U.S. unemployment rate in the months ahead.

We are unlikely to see an official print of the U.S. unemployment rate above Great Depression levels unless a resurgence of the virus requires another period of widespread business shutdowns to contain the outbreaks. Still, the U.S. labor market isn’t exactly healthy. The BLS noted that many people were likely misclassified as “employed but not at work” and should have been classified as unemployed.

If those misclassified folks were included, it would put the true U.S. unemployment rate at a far higher 16.4% down from April’s 19.5% level. If one includes marginally attached workers and those working part time for economic reasons, the unemployment rate would be 21.2%.

As of May, almost 21 million American’s remain officially unemployed about 6 million more than during the Great Recession peak.

Millions more have exited the labor force all together. Since January, the civilian labor force has shrunk by 6.4 million people and contracted 2.8% over the past 12 months.

The 3.1 million increase in private sector jobs in May was clearly driven by businesses that had been mostly shuttered in April. More than two-thirds of May’s nonfarm job gains came from just two sectors: leisure and hospitality (+1.24 million) and construction (+464 thousand).

Health care, retail trade, and manufacturing also added hundreds of thousands of jobs as furloughed workers got called back to work. Job gains were meager in financial services in comparison (+33k), while mining, information services, and government all continued to shed net jobs.

Government payrolls slumped 585,000 as census hiring slowed and state and local governments began to address gaping budget gaps. Moreover, it is important to keep these May job gains in perspective. From year ago levels, the job losses remain monstrous – 17.7 million net nonfarm payroll jobs lost; 6.7 million in leisure and hospitality and 2.8 million in trade, transportation, and utilities alone.

So where do we go from here? The quick rebound in employment and sizable drop in May unemployment is encouraging. This should ease a bit of the drop in consumer spending in the second quarter, and sets the U.S. up for a better growth rebound in the third quarter.

We are boosting our real GDP growth forecast to 15.2% annualized in the third quarter as consumer spending is forecast to increase at a 23 percent annualized rate on pent-up demand.

GDP growth is expected to cool in the fourth quarter, but growth gains should be strong enough to push the U.S. unemployment rate below 10 percent before the end of the year. Much could still go wrong.  A resurgence of the virus or a lack for further government support for state and local governments are still big downside economic risks in my opinion.

To find out more on how today’s job’s report impacts our economic and interest rate forecasts, check out this week’s U.S. Outlook Report.


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