EconoFACTS

June 04, 2021 | 09:20

U.S. Nonfarm Payrolls (May) — Workers Badly Needed

Economist

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

Sal Guatieri

Senior Economist and Director
Economics

Sal Guatieri is a Senior Economist and Director at BMO Capital Markets, with over two decades experience as a ma... (Read more)

For another month, nonfarm payrolls underwhelmed expectations in May, though much less so than in April, if you can call a 559,000 burst of net hiring a disappointment. But with payrolls still down 7.6 million (or -5.0%) from pre-pandemic levels, there is still much wood to chop. It helps that the prior two monthly gains were revised up by 27,000. Every bit helps. Private payrolls rose 492,000 in May, led by leisure and hospitality (292,000), with reopening restaurants and bars accounting for 186,000 of the increase. The problem is that vaccinated diners are streaming back so fast that establishments can't hire fast enough, and some former workers have been slow to return to the labour force. About 2.5 million persons say they are prevented from seeking work due to the pandemic, which is declining but still large. With L&H still down 2.5 million workers (or -15.0%) from February 2020 levels, the return of former workers is crucial to sustaining the recovery at the current strong pace. Rising wages and bonus payments will help (while sustaining higher inflation, alas). Public and private education also regained 144,000 positions, but that's still 1.1 million short of pre-virus levels. This will be a deep well for job growth (assuming supply improves) as state and local government finances are in much better shape than in the early days of the pandemic and there is $350 billion of American Rescue Plan Act funds to draw from. Two of the few sectors that shed jobs in May, construction and retail, clearly reflect lack of skilled and even unskilled workers to fill a record number of job openings.

The household survey pumped out 444,000 new jobs in May. That's good. But the participation rate fell a tick to 61.6% and has been locked in a narrow range since last summer. It's still 1.7 ppts below pre-virus levels. That's bad for future job growth, economic growth, and the inflation outlook. The unemployment rate dropped three-tenths to 5.8%, a new cycle low, though still well above the 3.5% pre-pandemic trough. Yet, reported labour shortages appear worse today than when the jobless rate was at a half-century low. Maybe we shouldn't be surprised that average hourly earnings popped more than expected, by 0.5%, kicking the yearly rate up to 2.0%...and note that the average is being held down by the return of lower-paying jobs. Unit labour costs are now trending at the fastest rate in four decades...and they are a key potential source of sustained inflation pressure.

Aggregate work hours rose a decent 0.5%, but the level so far in Q2 is "just" 5.0% annualized above Q1. We will need a further big surge in labour productivity (which is possible if businesses need to coax extra output from current staff to meet demand) to hit our 11% real GDP growth call for the quarter.

Our scorecard gives the May jobs report a grade of 84.8, which is up sharply from April and harks back to the high levels following the shutdowns of last year. So, this is a strong jobs report (50 is neutral), but it could be so much better if labour shortages were not such a pressing issue.

Bottom Line: Like home sales, hiring is being held back by a lack of supply, which can't keep up with roaring demand. And fiscal and monetary stimulus is still gushing through the system. The Fed's temporary-inflation mantra is sounding pretty dated, meaning taper talk will dominate upcoming policy meetings. But, with 9.3 million unemployed and millions of persons potentially returning to the labour force, a hike in policy rates is probably still some time away. If inflation remains somewhat in check.

Table 1 - United States — Employment

(change in thousands)

Source: BMO Economics, Haver Analytics