The establishment and household surveys told two different stories in May. The jobs numbers for the month were surprisingly high, with the survey showing a gain of 339,000 jobs. In addition, the numbers for the prior two months were revised up, so that the three-month average now stands at 283,000 jobs. At the same time, the household survey showed a drop in employment of 310,000, with the unemployment rate rising to 3.7 percent.
Hours Fall in May
In spite of the large increase in jobs, the index of aggregate hours actually edged down by 0.1 percent in May. We have been seeing some shortening of average workweeks throughout the year, with the index of aggregate hours still below its January level. In retail trade, it has fallen by more than 1.0 percent over this four-month period, while it is down 0.4 percent in leisure and hospitality. Part of this weakness is the result of an extraordinary figure for January, but since then, actual hours worked have been rising far more slowly than jobs.
This matters both because hours worked is the most direct measure of the demand for labor and for productivity data. It seems employers are hiring more workers, because they now can, and having their existing workforce put in fewer hours. This reverses the pattern seen earlier in the recovery.
The drop in hours also is good news from the standpoint of productivity. The average for the index so far in the second quarter is below the average for the first quarter. This should mean that we will see a healthy productivity growth figure for the quarter.
Wage Growth Is at 4.0 Percent
This report gave more evidence of moderating wage growth. The annualized rate of wage growth over the last three months was 4.0 percent. For the last six months it was 3.9 percent. This is down from a 6.6 percent annual rate at the start of 2022. The current rate is only slightly faster than what we saw in 2019 and should be close to a pace consistent with the Fed’s 2.0 percent inflation target.
It also appears that wage growth continues to be fastest for those at the bottom of the wage distribution. The average hourly wage for production and nonsupervisory workers in leisure and hospitality has risen at a 7.9 percent rate over the last three months, and a 4.7 percent rate over the last six months.
Prime Age Labor Force Participation Rate Edges Up
There was some good news in the household survey. The labor force participation rate (LFPR) for prime age workers (ages 25 to 54) edged up to 83.4 percent, which is 0.3 pp above its pre-pandemic peak. This was driven by a rise in the LFPR for women to 77.6 percent, the highest rate ever. The LFPR for men fell 0.1 pp, and is now 0.5 pp below its pre-pandemic peak.
Share of Unemployment Due to Voluntary Quits Falls Sharply
The share of unemployment due to people who voluntarily quit their jobs fell by 1.2 pp to 12.6 percent, the lowest level since December 2021. This is 1.0 pp below the year-round average for 2019. This indicates workers are far more wary about quitting a job before having a new one lined up.
Black Unemployment Jumps in May, Hispanic Unemployment Edges Down
There was a 0.9 pp jump in the unemployment rate for Black workers to 5.6 percent, after hitting a record low in April. Part of this rise is likely just error in the data, but the rise is large enough to indicate a real weakening in the labor market prospects of Black workers.
By contrast, the unemployment rate for Hispanic workers fell 0.4 pp to 4.0 percent. This ties a record low hit earlier in recovery.
Construction Continues to Add Jobs, Manufacturing Treads Water
Historically, construction and manufacturing have been the two most cyclically sensitive sectors of the economy and where job loss associated with a recession shows up first. Construction added 25,000 jobs in May, with even residential construction adding 2,500. The continued strength in residential construction is due to the large backlog of unfinished homes resulting from supply chain problems in the pandemic.
Manufacturing lost 2,000 jobs, after gaining 10,000 jobs in April. Employment in the sector is now down by 1,000 since January. If we were seeing signs of a recession, there would be a far faster pace of job loss.
Job Gains Spread Widely Across Sectors
Most sectors added jobs in May. Health care was the biggest gainer, adding 52,400 jobs, with the professional and technical services sector adding 42,700 jobs. Employment in the latter now stands 1,174,000 (12.1 percent) above its pre-pandemic level.
Restaurants added 33,100 jobs, while retail added 11,600. Restaurant employment is now just 0.4 percent below its pre-pandemic level.
State governments added 19,000 jobs, while local governments added 30,000 jobs. Employment in the two sectors is now below the pre-pandemic levels by 1.7 percent and 1.2 percent, respectively. At the current pace of hiring, both sectors would be back to their pre-pandemic employment level by the end of the year.
Child care added 3,600 jobs, while nursing homes added 2,900 jobs. Employment in the two sectors is now down by 4.8 percent and 11.6 percent respectively.
Information Services Loses 9,000 Jobs
Information services is the category that most closely corresponds to the tech sector. It shed 9,000 jobs in May, with employment now down by 45,000 (1.4 percent) from its peak in November. Still, in spite of the hype of a tech disaster, employment is still up by 17,000 from its level one year ago and 176,000 from the pre-pandemic level. Unemployment in the sector stands at 2.5 percent, down from 2.9 percent last May.
May Report Has Many Positives But Also Raises Serious Concerns
The strong job growth reported in the establishment survey is certainly not consistent with an economy falling into recession. At the same time, it is worth noting that the hours story is very different from the jobs story, with aggregate hours actually edging downward over the last four months.
The rise in unemployment in the household survey is cause for concern. As a general rule, the establishment survey is the far more reliable measure of the labor market, but a 0.3 pp rise in unemployment cannot be ignored. Also, the sharp drop in the share of unemployment due to quits is evidence of a weakening labor market.
If the goal of the Fed’s interest rate policy was to weaken the labor market, they seem to have gotten their wish. With luck, we will not see further deterioration, but it is difficult to try to predict the future based on this report.
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