May Employment Report Misses Expectations But Better Than April

The May Employment Report missed expectations of 675 thousand new jobs with 559 thousand jobs created. Even with the slight miss, the May results are more in line with the upbeat gains from March rather than the mediocre 278 thousand pick-up in April. The average over the last three months is 541 thousand which may provide a better, less volatile, indicator of where the labor market is trending. With around 7.75 million jobs still missing from pre-pandemic levels the three-month average would take around 14 months to recoup the missing jobs. That would put us into the second-half of 2022.  That could coincide with QE tapering being nearly completed which would then set the stage for the first rate hikes to commence in late 2022 or sometime in 2023.   Meanwhile, the unemployment rate ticked three-tenths lower to 5.8%. That’s a 5.3% drop in the last year but just 0.9% in the last six months as the gains are getting harder to come by. Also, the Fed is more likely to focus on the underemployment rate, a broader measure of unemployment which dipped to 10.2% from 10.4% in April. It bottomed at 6.9% in December 2019 and the Fed will want to see it get close to that before declaring mission accomplished. Also, the labor force participation rate (labor force/civilian population) dipped one-tenth to 61.6% from 61.7% the prior month.  It was 63.3% just prior to the pandemic. Even with the decent headline gain, until the underemployment and labor force participation numbers return to near pre-pandemic levels, indicating something close to full employment, the Fed will be very patient before tightening monetary policy, and that remains quite a ways off.


More on the Jobs Report

  • For the month, 559,000 jobs were created  versus an expectation of 675,000. Private payrolls added 492,000 jobs versus 219,000 in April. In addition, the prior two months were adjusted higher by 27,000 jobs.  The services sector as a whole gained a strong 489,000 jobs with leisure/hospitality leading the way once again with 292,000 new positions as good news on vaccinations and virus case counts led to further re-opening of service-oriented  businesses. Goods-producing jobs, after a sketchy April that was negatively influenced by seasonal adjustments, saw just 3,000 new positions.  Curiously, construction jobs were down 20,000 and manufacturing adding 23,000 positions, pretty much a push in the goods-producing sector which is somewhat disappointing.


  • The unemployment rate dipped two-tenths to 5.8% from 6.1% in April. It’s dropped 5.3% in the last year, but only 0.9% in the last six months as the gains get a bit more grudging. Fed Chair Powell has laid out one of the three criteria for lifting the fed funds rate is a return to full employment. If we use the pre-pandemic low of  3.5%, or close to it, as a marker for full employment we’re 2.3% away. Cutting it two-tenths a month puts it about a year out.  The labor force participation rate (labor force/civilian population), however, went the wrong way dipping one-tenths to 61.6%. It was 63.3% pre-pandemic.


  • Finally, the underemployment rate which is a broader measure of unemployment as it adds those working part-time but wanting full-time work and those marginally attached to the labor force (out of work and not having looked for a job in the preceding four weeks) dipped from 10.4% to 10.2%. It was as low as 6.9% prior to the pandemic. Getting people back in the labor force and boosting that participation rate to pre-pandemic levels and getting the 75 million still unemployed a paycheck are key policy goals for the Fed in deciding when we are back to full employment, and as you can see we’re still a long way off.


Initial Jobless Claims Heading in the Right Direction Too

In addition to the good news on the employment front, jobless claims numbers are also heading in the right direction, and in this case it’s lower. Initial claims fell 20,000 to 385,000 in the week ended May 29. This was the fifth-consecutive decline to a new pandemic low. Bloomberg consensus was looking for a drop to 387,000. Other unemployment programs saw declining uptake as well with the Pandemic Unemployment Assistance (PUA) declining by 17,000 to 76,000. Continuing claims, however, rose by 169,000. Across all programs, there are about 15.4 million people claiming some unemployment benefit with the bulk in the PUA and PEUC programs. Continuing claims in the traditional state programs are at  3.7 million. The pandemic-related programs are set to expire in September, although 24 states have announced early suspensions so the 15.4 million number should start to decline shortly.


Employment Population Ratio Reveals Remaining Shortfall

The pandemic-related impact on the labor force has been unique and it has created challenges for the Fed in assessing the health of the labor market and in determining the pool of available workers. With lockdowns and remote school learning, many previously employed, many women, not only left jobs but left the labor force as defined by the BLS (not actively looking for employment). One metric we have seen the Fed reference more in recent months is the Employment Population Ratio. This is simply the ratio of employed persons to the working-age population (15yr—64yr). This removes the distortion of who is considered in or out of the labor force which is used in unemployment calculations. As shown in the graph, the ratio currently stands at 57.9%, well short of the pre-pandemic 61.0%, but moving in the right direction.


Source: Bloomberg



Market Rates

Treasury Curve Today Chg Last Wk. LIBOR Rates Today Chg Last Wk. FF/Prime Rate Swap Rates Rate
3 Month 0.02% +0.01% 1 Mo LIBOR 0.09% Unchanged FF Target Rate 0.00%-0.25% 3 Year 0.429%
6 Month 0.03% Unchanged 3 Mo LIBOR 0.13% Unchanged Prime Rate 3.25% 5 Year 0.891%
2 Year 0.15% Unchanged 6 Mo LIBOR 0.17% Unchanged IOER 0.10% 10 Year 1.584%
10 Year 1.61% +0.01% 12 Mo LIBOR 0.24% -0.01% SOFR 0.01%


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Published: 06/03/21 Author: Thomas R. Fitzgerald