I don’t usually offer instant reactions to economic news, but the May Jobs Report was a shocker. Non-Farm Payroll gained 2.5 million jobs, compared to an expected loss of -8 million. The Diffusion Index bounced back strongly, indicating breadth in job gains.
This was a positive and highly constructive report for the economy. Before everyone gets overly giddy, the report also highlighted some key risks to the outlook.
Where the jobs came from
Nearly all of the 2.5 million in job gains came from the “private services providing” sector. Half of that was attributable to “leisure and hospitality”, with additional major gains from “retail trade” and “health care and social assistance”. Equally constructive was the 39.1K increase in temporary employment, which is a leading indicator of employment and shows rising labor market tightness. As well, average weekly hours and overtime hours rose across the board, which is another sign of a healing economy.
The unemployment rate was consistent with the direction, though not the magnitude, of the continuing jobless claims data. In the past, the red line (unemployment rate) was above the blue line (continuing claims). While the unemployment rate fell in a direction that was consistent with continuing claims, there is a discrepancy in magnitude.
Companies are calling furloughed employees back, mainly in the hospitality and retail industries. Another interpretation of this report is the Paycheck Protection Program (PPP) worked to encourage employers to keep paying workers, and returned many back onto the payroll.
Here are some of the key risks. First, the unemployment rate for Blacks and Asians rose, which is not helpful in light of the latest round of protests.
One of the key questions is how the Fed reacts to this report. There is an FOMC meeting next week. Will they start to change their body language and hint at taking their foot off the QE accelerator? Watch the USD and interest rates. The USD Index is nearing a key support zone, and yields are rising. Rising yields and a bullish reversal in the USD could be a headwind for equity prices.
The callback of workers is a good news, bad news story. The good news is many workers are closely linked to their employers, and the callback in hospitality and retail industries is encouraging. The risk is the emergence of a second pandemic wave that prompts another shutdown. The daily graph of new confirmed cases have been edging up in a number of states, such as California, Florida, Louisiana, Washington State, Arizona, Tennessee, and Vermont, just to name a few. As different jurisdictions have reopened their economies, the revival in case count might be enough to prompt re-impositions of stay-at-home orders again, which would shut down the local economies. This has the potential to batter an already fragile small business sector, and prompt a second wave of layoffs and unemployment.
Finally, how will Congress react? The strong May Jobs Report could prompt lawmakers to drag their feet on another stimulus package. The U6 unemployment rate, which includes discouraged workers, did not show as much improvement. It fell from 22.8% to 21.2%, which is still very high. PPP payments expire at the end of July. If the program is not renewed, the economy is likely to face significant headwinds to a sustained recovery.
The stock market is roaring ahead today on the good employment news, but investors should keep in mind the key risks facing the growth outlook.