US labor market recovery starts a month earlier than expected

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      By Andrew Szczurowski, CFAPortfolio Manager, Global Income Group, Eaton Vance Management

      Boston - In a surprising turn of events, the US economy added a record 2.5 million jobs in May after losing roughly 22 million jobs in the previous two months. Out of the 78 economists surveyed on Bloomberg, not a single one predicted that the US economy would actually add jobs, and the average estimate was for 7.5 million job losses in May. So what happened? How could every economist have been so far off on this jobs report?

      First, let's cut the economists a break: None of them are used to predicting employment numbers during a global pandemic. Economists knew that parts of the country had begun to allow businesses to reopen in May, and that would allow workers to start returning to their old jobs. But there was also supposed to be a backlog of unemployed workers who hadn't been fully captured in the prior month's data due to processing delays, which were incredibly difficult to forecast. Economists were expecting this report to be the last month of job losses before a rebound began in the June data.

      It now seems the labor market recovery has started earlier than expected. While next month will likely show even larger job gains, we still need to add 19.5 million more jobs to get us back where we were in February.

      Getting to the details

      The unemployment rate was expected to spike from 14.7% to 19%, instead it actually fell to 13.3% — another great sign that the recovery has begun earlier than expected, but we have a long way to go to return to the record-low 3.5% unemployment rate in February. The underemployment rate, which includes those not working at full capacity, is probably more important to look at right now, and it only fell from 22.8% to 21.2% — still extremely elevated.

      After the spike in average hourly earnings in April as lower wage employees lost their jobs, average hourly earnings fell 1% month over month in May, this time as lower wage workers returned to their jobs. And with more workers who were furloughed going back to their jobs in the coming months, the spike in average hourly earnings will likely continue to reverse.

      The Bureau of Labor Statistics (BLS) noted in the payroll report that the number of unemployed workers who were temporarily laid off decreased by 2.7 million in May to 15.3 million. The biggest negative came in the appendix, where it was noted that 295,000 workers were permanently laid off in May.

      We will be watching the permanent layoff numbers over the coming months, as there are certainly many businesses that are struggling to survive and others — like the restaurant industry — that may not be able to operate at 100% capacity for the foreseeable future.

      In the short term, it does seem that the US government's Payroll Protection Program has been effective at keeping employees on payrolls, but permanent layoffs could rise as the terms of these forgivable loans expire.

      Looking at the sector breakdown

      The construction industry added 464,000 jobs in May, after losing 995,000 jobs in April. As construction resumes in much of the country, most of those job losses could come back in relatively short order.

      Dentist offices added 245,000 jobs in May, which would be incredible except that they lost over 500,000 jobs in April.

      Despite the ongoing pandemic, US hospitals subtracted another 27,000 jobs in May, on top of nearly 130,000 jobs lost in April. The ban on elective procedures in many parts of the country has led hospitals to furlough workers as their revenues were cut.

      After losing over 5 million jobs in April, bars and restaurants did add back almost 1.4 million jobs in May. Many of these establishments still face very uncertain futures because of limits on occupancy, which will put even more pressure on their generally thin margins.

      The government sector continued to shed jobs, with most of the pain being felt in education. State education jobs fell by 64,000 and local government education jobs fell by 310,000. How quickly state and local governments can recoup lost revenues will be important to watch over the coming months.

      Bottom line: We expect to see record-high job gains in the months ahead as the US economy reopens and furloughed workers return after record-deep layoffs in the spring. While the earlier-than-estimated improvement in the labor market is no doubt a great sign, we still have a long and painful road ahead before the US economy returns to full employment. We will be keeping an eye on the permanent layoff numbers to get a better idea how many of the 19.5 million jobs lost during the last few months may not be coming back.