Payroll employment is expected to rise by 500,000 in May. That is better than the 266,000 jobs that we added in April but would mark another disappointment for an economy still 8.4 million jobs short of the February 2020 peak. The private sector will account for about 425,000 of the gains; the public sector is expected to add another 75,000 jobs in May. School districts are hiring up for summer programs that were canceled last summer. The federal government is scrambling to rehire for key agencies that lost funding in recent years. Retirements, which accelerated during the pandemic, are the primary challenge. Employers will need to cast their nets more widely and abandon ageism to bring back older workers who left the labor market during the pandemic.
We expect to see private sector hiring driven by solid gains in leisure and hospitality. The problem is the seasonal adjustment, which poses an even higher hurdle than last month. We need to hire back more than 350,000 workers just to break even on seasonally adjusted hires in the leisure and hospitality sector. May gains will likely be more broad-based than we have seen thus far including a pickup in arts and entertainment as well as food and accommodation. Amusement parks, movie theaters and casinos all ramped up hiring in May.
Manufacturing activity should have rebounded slightly. Vehicle plants idled by chip shortages started to reopen. Construction jobs are expected to increase despite a slowdown in housing construction. Escalating material costs and supply constraints prompted many builders to delay the completion of homes started in April; there should have been some moves to catch up on projects during May. Many bottlenecks will dissipate later this year as production is ramped up. Consumers will pivot to spending on services, away from goods.
Health care is another sector to watch as patients scramble to make up appointments avoided during the pandemic. Everything from routine exams to elective surgeries was postponed. Plastic surgeons are doing particularly well as baby boomers have attempted to roll back the clock for conference calls on Zoom.
Average hourly earnings are expected to edge up 0.1% for May and only 1.5% from a year ago. Much of the weakness in hourly earnings can be attributed to what are termed “base effects.” A loss of low-wage jobs a year ago artificially boosted average hourly earnings then but have made for harder year-on-year comparisons. A move to lure back retired workers or those in retraining has prompted a pickup in wages paid by many of the largest employers. Walmart, Target, Amazon and fast-food restaurants have all announced wage hikes in recent months. Those employers have benefited the most from the pandemic by leveraging existing technologies, which help to buffer the effect of higher wages on profits margins. Smaller businesses were not so lucky.
The number of average hours worked is expected to pick up as businesses scramble to reopen despite labor market gaps. Availability of daycare, vaccine safety and fear of returning to crowded workplaces remain concerns for many low-wage workers. Summer programs, greater vaccine uptake and reduction in transmission associated with outdoor venues should help alleviate some of those concerns.
Our forecast shows the unemployment rate dropping to 5.9% in May after rising a bit in April. The pickup in employment and recall of furloughed workers, notably in the airline industry, should help bring down unemployment. Furloughed workers are counted as temporarily unemployed even if they were paid during the survey week. The key will be what happens to the ranks of the long-term unemployed, which continued to increase in April. We would like to see those ranks decline, especially given complaints about labor shortages. The last into the labor force who were hired early in 2020 were among the first to be cut in response to the pandemic. Those are the workers the Federal Reserve wants to see back at work before raising rates again.
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