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First Cut: The upside surprise in the May payroll data doesn’t makes up for massive numbers of jobs lost in April

To widespread astonishment, nonfarm payrolls were up 2.509 million in May and the unemployment rate fell to 13.3%. The Bureau of Labor Statistics said, “These improvements in the labor market reflected a limited resumption of economic activity that had been curtailed in March and April due to the coronavirus (COVID-19) pandemic and efforts to contain it.”

While on the surface this is a positive development, it should not disguise that payrolls are still down significantly after the drop of 20.687 in April and that the unemployment rate is not that far below historic highs. Some workers were recalled in May as businesses could access funds via the Paycheck Protection Program and others were back on payrolls as businesses adapted to changed circumstances and ramped up activities via online sales or other efforts to provide services while allowing for social distancing.

The average workweek was up 0.5 hour to 34.7 in May with the resumption of some activity. Average hourly earnings fell 1.0% month-over-month as lower wage workers were once more earning after the up 4.7% in the prior month when the data was skewed with their absence. Still, the up 6.7% compared to May 2019 suggested that lower wage workers were still less of a presence among earners.

Payrolls were up 669,000 among goods producers. Manufacturing payrolls were up 225,000 after some manufacturers were able to repurpose production for in-demand items like personal protective equipment or brought back workers with relief funds. Construction was up 464,000 as activity resumed after companies had a chance to rescale and reassign projects. Mining payrolls were essentially unchanged at 50.1 with energy prices still sufficiently low and surpluses high enough to prevent a need for extraction. Service sector payrolls were up 2.425 million with the recall of many service workers in retail (368,000). The need to apply for government relief may have been behind the increase in professional and business services (127,000). There were also large gains for health care and social assistance (390,700) that could be part of the response to COVID-19. However, it was the rise in leisure and hospitality (1.239 million) that accounted for about half the rise when businesses prepared for the reopening of activity and the start of summer vacation season.

The decline in the unemployment rate to 13.3% in May after 14.7% in April may lead to cautious optimism that the economic downturn will be shorter than previously thought. Improvements for the U-6 rate to 21.2% after 22.8% could also provide a little hope that those on the margins of the labor market will not be shut out as much as they might have been in a deep and/or lengthy recession.

Fed policymakers are going to read these numbers with care and a certain skepticism. However, the May report offers evidence that early efforts to stem the loss of activity have been successful and the possibility that the economic downturn will need less intervention to recover from. However, it is too soon to say that steps to reopen the economy have not resulted in another wave of COVID-19 infections and that quarantines will need to be reimposed. The FOMC is going to keep rates low, forward guidance generous on the time in which those rates remain, as well as asset purchases plentiful for now.

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