Labor Market Brief: Improvement Sooner than Expected

While economists continue to observe and analyze the long-term effects of the COVID-19 shutdown, the U.S. Department of Labor’s May jobs report hints that a recovery may already be underway. An estimated 2.5 million Americans regained employment in May. An easing of lockdown restrictions and a second round of Paycheck Protection Program (PPP) funding aimed at small- and mid-sized businesses, in large part, are credited with the improved numbers. The (U-3) official unemployment rate, which covers people actively seeking employment ticked down 1.4% to 13.3% in May, while jobless claims slowed to 1.51 million in the second week of June.

All of this comes against the backdrop of the world’s largest economy steadily reopening for business, reemerging from a deliberate three-month pause. In late-March, as states started to implement stay-at-home orders, an economic and labor crisis became imminent. More jobless claims were filed in the 10 weeks that followed the shutdowns than throughout the entirety of the 2007-09 recession. The April unemployment rate reached 14.7%, its highest reading since the Great Depression.

The May employment numbers are welcomed news for a labor market that has weathered unforeseen turbulence. Some economists had predicted that conditions would continue to worsen before starting to improve. Many health experts have been viewing the lack of interstate coordination in the reopening process as a precursor to a potential second wave of the pandemic.

Even if states can evade new clusters of community spread, additional factors could limit the speed of the recovery. The lack of a vaccine will result in some consumers staying at homes by choice, even as restrictions are relaxed. Furthermore, the sobering fact remains that some businesses will never recover from the crisis, leaving many of the job losses permanent.

Based on Bloomberg data, the May jobs report’s forecast was for the civilian unemployment rate to rise by 5.0 percentage points to 19.7%; to the delight of markets, it instead fell to 13.3%.

The (U-6) unemployment rate includes the headline rate plus marginally attached or discouraged workers, and persons working part-time for economic reasons. This statistic fell by just 1.6 percentage points to 21.2%, signaling that most of the improvement came from the decline in U-3.

Since the headline unemployment rate is contained within the U-6 rate, we can infer that there was little improvement to the broader measure of labor underutilization. Only 254,000 people working part-time for economic reasons in April were able to find full-time employment in May. An additional 6.3 million workers today have transitioned out of full-time work into part-time roles due to the economic effects of COVID-19.

Looking under the hood, we find that the industries propelling the rebound are those most likely to benefit from the reopening. Topping the job creation list are the service, hospitality and manufacturing sectors.

The public sector, which cannot access PPP funding, remained the hardest hit segment of the labor market in May. State and local governments allocated a disproportionate share of available public financing to reduce the pandemic’s medical risks. As a result, many public institutions, including school districts, were left vulnerable, leading to continued layoffs.

In the coming months, it will be critical to keep an eye on both the headline unemployment rate and broader measures of labor underutilization. Moreover, the pace of recovery will be uneven across different industries, as some sectors will adjust more easily to the economy’s new normal than others. Putting May’s data in context, these trends suggest that while the worst may be behind us in the labor market, it will continue to face headwinds as the U.S. economy deals with the challenges of a sustained global pandemic.

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