Delayed gratification Delayed gratification\images\insights\article\donut-on-plate-small.jpg June 4 2021 June 4 2021

Delayed gratification

The labor market recovery is tantalizingly close, but not here yet.

Published June 4 2021
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The good news is that the growth in nonfarm payrolls accelerated by 559,000 jobs in May, the unemployment rate declined to 5.8% (a 14-month low) and wages have expanded at a very healthy annualized pace of 7.2% over the past two months. But the bad news is that the disappointing pace of this labor-market recovery was well below expectations for the second consecutive month.

‘Round up the usual suspects’ With apologies to "Casablanca's" Captain Renault, many of the same issues were at play in May as in April. On a non-seasonally adjusted basis, May 2021 added a robust 973,000 jobs, compared with April’s revised gain of 1.097 million. But in reporting an increase of only 559,000 jobs last month (compared with a consensus gain of 675,000 jobs), the Labor Department revised payroll gains down by 414,000 positions due to their seasonal adjustment. In April 2021, the seasonally adjusted gain of 278,000 jobs was 819,000 less than the non-seasonally adjusted print. Looking across the proverbial valley, these same negative trends will likely remain in place for June. But since 2000, the month of July has boasted a powerful average upward seasonal adjustment of 1.3 million jobs.

Claims, ADP and JOLTS remain strong Initial weekly jobless claims plunged to a 14-month low of 385,000 for the week ended May 29, down 94% from their peak of 6.15 million for the week that ended on April 4, 2020. The ADP National Employment Report showed that the private sector added the most jobs in 11 months in May, surging 50% month-over-month to 978,000 private workers. The Job Openings & Labor Turnover Survey (JOLTS) posted a much stronger-than-expected record high of 8.123 million job openings in March.

Washington on hold The powerful underlying recovery in these three labor-market leading indicators over the past year suggests the jobs picture should continue to improve in coming months due to the highly accommodative fiscal and monetary policy put in place at the economic trough of the pandemic. But given the near-term disappointment over the past two months and the possibility of another miss in June, we expect the Federal Reserve to remain patient with asset purchasing and zero-bound interest rate plans. Moreover, we expect President Biden will use today’s miss as further justification to pass his $4.7 trillion fiscal stimulus proposal.

Chilling effect on hiring? But many businesses point to Biden’s $1.9 trillion American Recovery Plan, signed into law in March, which extended an unemployment bonus of $300 per week to Sept. 6. That’s in addition to average weekly unemployment benefits from the states that average $318 per week (within a range of $387-$275.) That $618 average weekly unemployment benefit in a 40-hour work week translates to $15.50 per hour. In addition, the March stimulus law also included a tax exemption of the first $10,200 in benefits for 2020, raising the effective wage rate up to about $18-$20 per hour.

So for less-skilled, lower-wage workers concerned about contracting Covid-19, and who still have child care or school issues with their kids in states where those facilities are not yet opened, it made perfect financial sense for them to remain home collecting generous unemployment benefits rather than returning to their now-open jobs. But companies find themselves bidding against these generous unemployment benefits, to entice their employees to come back to work.

As a result, at least 25 states have already announced they are scaling back the $300 federal unemployment bonus during mid-June to mid-July. Some states are now offering financial incentives for individuals to find work, and others are requiring unemployed persons to prove that they are actively searching for work to receive their assistance. If they reject a suitable job, then they may lose their benefits. So, we expect that nonfarm payrolls could improve sharply in July and September as these benefits expire and kids return to school.

Labor market choppy The household survey gained 444,000 workers in May, versus 328,000 in April and 609,000 in March. The civilian labor force fell by 53,000 workers in May, down sharply from increases of 430,000 jobs in April and 347,000 in March. The number of unemployed workers declined by 496,000 people in May, compared with an increase of 102,000 people in April and declines of 262,000 in March, 158,000 in February and 606,000 in January.

The unemployment rate (U-3) declined to a 14-month low of 5.8% in May from 6.1% in April, down sharply from its peak in April 2020 of 14.8% (the single worst month for the labor market since record-keeping began in 1939). The labor impairment (or underemployment) rate (U-6), a better and broader barometer of the labor market that includes both part-time and discouraged workers, also fell to a 1-year low of 10.2% in May from 10.4% in April, well below its record high of 22.9% in April 2020. Unfortunately, the labor force participation rate declined to 61.6% in May from 61.7% in April. But it is still well above its trough of 60.2% in April 2020, a 47-year low.

K-shaped recovery continues The unemployment rate for those with a bachelor’s degree or higher continued to decline, falling to 3.2% in May from 3.5% in April, well below its 8.4% peak in April 2020. The unemployment rate for individuals with less than a high school diploma also fell, dropping to 9.1% in May from 9.3% in April (but up from 8.2% in March), though it remains sharply below its peak at 21.2% in April 2020.

Labor-market internals mixed Leisure & hospitality continued its powerful recovery, adding 292,000 jobs in May, compared with 328,000 in April, 227,000 in March and 413,000 in February. Construction surprisingly lost 20,000 jobs in May, after losing 5,000 jobs in April, compared with a robust gain of 93,000 jobs in March. Education & health services added 87,000 jobs in May, versus gains of 25,000 in April and 104,000 in March. Manufacturing gained 23,000 jobs in May, reversing a surprise loss of 32,000 jobs in April, compared with a healthy increase of 51,000 in March. Retail lost another 6,000 jobs in May, on the heels of a loss of 30,000 jobs in April, after adding 42,000 jobs in March. Temporary help (an important labor-market leading indicator) added a modest 4,000 jobs in April, after losses of 116,000 jobs in April and 6,000 in March.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Job Openings and Labor Turnover Survey (JOLTS) is conducted monthly by the U.S. Bureau of Labor Statistics.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.