This Friday, the Bureau of Labor Statistics will release the May jobs report. Following a disappointing April report, May’s report will be watched closely for indications of whether the April report was a blip or a sign of a more substantial slowdown. May is likely to show the jobs recovery picking up steam again, but will likely still be more modest than previously anticipated before the April report. These are four things I’m watching for in Friday’s jobs report:
- Modest rebound in payroll gains: Payroll gains are likely to rebound from a disappointing April, rising 600,000. While this would be a strong report during normal economic times, it would still be a setback from the forecasted 1-million-a-month job gains anticipated just a month ago.
- The shortages effect: The economy is dealing with multiple types of shortages, with certain industries seeing harsher impacts. Supply shortages of materials may impede jobs growth in industries like manufacturing or construction. Similarly, labor shortages could slow job gains in frontline service roles in industries like leisure & hospitality.
- Elevated earnings and hours: The crunch from labor shortages is likely to put upward pressure on both average hourly earnings and average weekly hours in affected industries, like leisure & hospitality as employers attempt to attract more workers and increase hours for the workers they do have.
- Unemployment rate largely unchanged: The unemployment rate rose slightly to 6.1 percent in April. We expect the unemployment rate to remain largely unchanged in May as workers begin searching for work (adding them back into the labor force), but it takes time for them to find new jobs (transitioning them from unemployed to employed).
What’s the Near-Term Outlook for Labor Shortages?
Over the last three months, reports of labor shortages have skyrocketed. In particular, employers in leisure & hospitality have been turning to diverse tactics to attract workers with everything from free food to more straightforward raises.
The April jobs report appeared to show evidence confirming these concerns. Not only did the report show slowing job gains, more importantly it also showed average hourly earnings shooting up 6.8 percent year-over-year for production and nonsupervisory employees in leisure & hospitality, with almost all of that increase occurring since December. The increase in wages is a prominent indicator that employers are raising pay to attract workers.
Reports of labor shortages have not slowed down in May, but job search activity does appear to be rebounding. Google Trends data shows that searches for jobs surged 27 percent from their trough in mid-March to their mid-May peak. Job searches are now near their highest level in 2021.
If the slowdown in the recovery is being driven predominantly by labor shortages, these conditions may only partially ease in coming months. The pandemic is still ongoing, with only 4 in 10 Americans fully vaccinated. And, as the school year ends, many parents will again need to juggle childcare needs and work. While the public health and employment situations are improving, there still remain significant barriers to returning to pre-crisis employment levels.
Why is Job Growth Slowing?
While the labor shortage debate has been front and center, two mechanical trends also may be contributing to the jobs growth slowdown.
First, the stock of temporary layoffs has declined dramatically, from a peak of 18 million in April 2020 to 2.1 million in April 2021. The number of temporarily laid off workers has not significantly changed since February. While some of these workers will be recalled as the economy fully reopens, we may have picked the low-hanging economic fruit of the labor market recovery. At this point, job gains will need to come from connecting the permanently laid off or labor force dropouts to new employers and new jobs, a far taller task.
Second, the slowdown in employment growth in April was largely due to an increase in outflows from employment to unemployment or out of the labor force. April actually saw an increase in inflows into employment, but that was offset by the larger rise in outflows.
This trend could be interpreted more optimistically because there wasn’t a clear reason for outflows to increase in April. The lack of a clear reason may point to a hiccup in the recovery rather than a structural trend. And if the rise in outflows was a blip, that may indicate we’ll see an uptick in jobs growth in May and in the coming months as the economic situation continues to improve.
Outlook for May and Beyond
The slowdown in April may have been a leading indicator of a more sluggish recovery as the summer begins. Several real time indicators paint a holistic picture of modest job growth in May. For example, the ISM Manufacturing Employment Index slowed in May as the share of employers indicating declining employment spiked. While unemployment insurance initial claims have declined dramatically, the improvement in continuing claims has slowed. The Real-Time Population Survey actually showed employment declining by a large but statistically insignificant amount.
The spring jobs reports may point to a recovery that’s slow getting off the starting blocks, but nevertheless has room to pick up momentum in 2021. Most importantly, the public health situation is improving, enabling the economy to reopen more broadly. If public health conditions improve further and the pandemic abates in the United States, we could see a much more significant upswell in the labor market by the end of the year. Overall, while the road to recovery may be bumpy, the labor market is still on the right track.