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Job growth accelerated in the United States in May, although it remained below analyst expectations. More than half the jobs created were in the leisure and hospitality sector. Participation in the labor force declined while employment increased. The result was a sharp decline in the unemployment rate. Investors greeted the jobs report favorably, pushing up equity prices while pushing down bond yields. They evidently saw the report as an indication of continued strong economic growth but mild inflationary pressure. Let’s look at the details.
The US government produces two reports on the job market—one based on a survey of establishments, the other based on a survey of households. The establishment survey found that 559,000 new jobs were created in May, far more than the upwardly revised 278,000 jobs created in April, but less than the 785,000 jobs created in March. While this is up about 12 million jobs from a year earlier, it remains about 7.6 million jobs below the prepandemic level of February 2020. Thus, the job market remains somewhat depressed.
The manufacturing sector saw 23,000 new jobs, entirely due to job growth in the automotive sector. Meanwhile, construction employment declined sharply, likely reflecting shortages of key inputs as well as skilled labor. The construction industry has long relied on migrant workers from Mexico. Cross-border movement of labor has been severely disrupted by the pandemic.
As for employment in services, 292,000 jobs were created in the leisure and hospitality sector, less than in April but more than in March. This included 186,000 jobs at restaurants and bars, 35,000 at hotels, and 72,000 at arts, entertainment, and recreation facilities. This surge reflected the reopening of the economy across the country as well as greater confidence owing to increased vaccination. In addition, there were 87,000 new jobs in education and health services. However, the retail sector saw a net loss of almost 6,000 jobs, including a 26,000 decline in jobs at grocery stores. This likely reflected the shift of consumer spending away from meals at home and toward restaurants. Even large general merchandise stores saw a decline of nearly 5,000 jobs. However, clothing stores boosted employment by more than 10,000, possibly indicating that people are increasingly concerned with their appearance now that they are going out again. Also, because there continues to be growth of online commerce, employment in transportation and distribution increased by 23,000. Finally, employment in state and local governments increased by 78,000, possibly due to the impact of stimulus money provided by the Federal government.
The establishment survey also provides data on average hourly wages. It found that the May average hourly compensation was up 1.9% from a year earlier, a relatively mild number. However, there were big differences by industry. Compensation was up 6.1% in financial services, even though employment in the sector was stagnant. Compensation was up 4.3% in retail, possibly indicating a struggle to attract people to work in stores. And compensation was up 3.7% in the thriving leisure and hospitality sector that’s working hard to ramp up capacity. That said, compensation was up only 1.0% in manufacturing. The overall modest boost to wages suggests that the economy is not yet facing the kind of wage-price spiral that would ignite sustained inflation. Thus, it is no wonder that bond yields fell following release of this report.
The separate survey of households indicated that, although the working-age population grew by 107,000 in May, labor force participation fell by 53,000. Participation means people who are either working or actively seeking employment. The decline suggests that some people became discouraged because of a skills mismatch. Meanwhile, employment grew strongly. The result was that the unemployment rate fell from 6.1% in April to 5.8% in May, the lowest level in 14 months. The unemployment rate among those aged 16 to 19 fell dramatically, indicating the likely return of younger workers to the retail and hospitality sectors. There was also a sharp decline in the number of people unemployed for more than six months.
The relatively moderate pace of job growth, combined with limited wage gains, suggests that the Federal Reserve is likely to leave monetary policy unchanged. The decline in participation suggests continued reluctance on the part of some potential workers to engage in the labor force. When, later this year, children go back to school and daycare full time, it is possible that many hesitant workers will reenter the labor force. If herd immunity is reached later this year due to mass vaccination, those fearful of the virus will likely return as well. Plus, once supply-chain disruptions are resolved, businesses will be in a better position to boost hiring further. Thus, there are reasons for optimism. On the other hand, another surge in infections later this year could set the clock back substantially. Experts in the field of public health have said that this is not a trivial risk, especially in states with low rates of vaccination and high rates of mobility and social interaction.
By Ira Kalish
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