Employment Still Strong

Payroll employment rose by 390,000 in May, after being revised up to 436,000 for April. That is still more than double the monthly pace of job gains of the 2010s before the onset of the pandemic. Private sector payrolls accounted for 333,000 of those gains. Hiring in the public sector jumped by 57,000; gains were driven by a jump in hiring in public education at the state and local levels and a push to staff up at the IRS. Retirement of postal workers was a drag on federal payrolls.

Gains in leisure and hospitality added 84,000 jobs; about two thirds of those gains were in accommodations and food services. The remainder were concentrated in theaters and sporting arenas. Consumers are scrambling to escape their homes, be entertained and travel. Movie theaters are facing supply chain problems; popcorn is getting hard to source, which along with the energy of the audience, is one of the best parts of a blockbuster movie. Air travel was up a whopping 25% during the Memorial Day weekend from a year ago.

Business travel is also returning. Convention centers and trade shows are ramping up. Hotel occupancy rates have rebounded sharply, with business during the week as well as the weekend rising, even in urban areas. Staffing shortages remain acute so you still may not get your room cleaned as often as it was in the past.

Next up, professional business services, which have been on a tear, rose by 75,000 jobs. This is one of the few sectors that has not only recovered the ground lost to the recession but skyrocketed to a whole new high. Employment in the sector was 821,000 above its February 2020 level in May.

Warehousing and transportation continued to post strong gains. Truck transportation, which reflects a ramp up in heavy manufacturing outside of the vehicle sector. Note, large online retail behemoths are not counted in this category, but in retail instead.

Gains in construction picked up slightly, with the largest increases in specialty contractors. Residential led those gains, although there has been a rise in activity in remodeling in the commercial real estate sector; offices are being reconfigured for a return to work.

Hiring in manufacturing posted solid but not spectacular gains. Motor vehicles and equipment lost ground, while fabricated metals and nondurable goods (including food, paper and chemicals) picked up. Lockdowns in China are expected to hit manufacturing and retailers with a lag. The worst of the supply chain problems are expected to show up over the summer.

The largest losses in employment were in the retail sector. Big-box discounters, which found themselves overstaffed as consumers pivoted from spending on goods to services, shed the most jobs. They had held onto holiday hires during the Omicron wave.

Average hourly earnings rose only 0.3% and 5.2% a year ago. That marks a slowdown from the 5.5% we saw last month and is largely due to the slowdown in growth in wages for supervisory workers. Wages for nonsupervisory workers actually accelerated during the month and rose 6.5% from a year ago, close to the annual pace we saw in April.

Separately, the unemployment rate held at 3.6%, which is only a tenth of a percent above the low hit in February 2020. The Federal Reserve has begun to define full employment as higher than that. The Fed is now defining a “soft-ish” landing as one that includes a move up in the unemployment rate.

The participation rate edged up a bit. Gains were fairly broad-based, with the exception of Black men, who held onto gains they made in April. The participation among teens fell again, despite ultra-tight labor markets. Public pools in many areas have been unable to find lifeguards and will not open this summer.

Employment in the household survey also moved up. Women gained slightly more jobs than men but are still trailing men since the onset of the crisis. Male employment has crossed its previous peak, while women are still below the peak hit in February 2020.

Higher prices at the gas pump limited the radius that workers could seek work and still make ends meet. That is likely suppressing the participation rate given the shortages we still face and the high level of demand for workers.

Multiple job holders fell by 237,000 during the month to the lowest level since November 2021. I would like to believe that is because more people could make ends meet with one job. I would hazard to guess that higher prices at the gas pump are a larger issue, as they make it harder to justify the commute costs of an extra job. Uber drivers have dropped dramatically in many urban areas in recent months; this has triggered surge pricing for the drivers who are left.

Better news is for the long-term unemployed, which continued to drop. We are now at the lowest levels for the long-term unemployed since June 2020. Continuing unemployment claims fell to a new pandemic low in the initial unemployment claims data for the week ending May 14; that was the week of the employment survey for the month of May.

Separately, the number of workers out ill during the survey week rose to 1.35 million, the highest since February. That is 42% above the average we saw pre-pandemic and is adding to staffing shortages and pushing up the cost of labor. Small businesses are being hit hardest, Their views about the prospect for the economy dropped to the lowest level on record in the April NFIB survey. (The data dates back to 1973.) We hit an all-time peak in the number of 3.6 million workers out sick during the height of the first Omicron wave in January.

Bottom Line
The labor market remains “unsustainably” strong for the Federal Reserve, which is now willing to tolerate higher unemployment to derail inflation. Many on the Fed believe that the natural rate of unemployment - also known as the non inflationary rate of unemployment - has moved up from the 3.5% range we saw pre-pandemic to somewhere between 4% and 5%. A rise in unemployment of that magnitude would constitute a recession.

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