Labor market starting to heal
Bottom Line In a stunningly positive reversal of fortunes, the Labor Department reported a record gain of more than 2.5 million nonfarm jobs in May, more than double the previous high of 1.1 million jobs added in September 1983. The truly shocking part is that the Bloomberg consensus was forecasting a loss of 7.5 million jobs—making today’s number a positive swing of 10 million. Even our wildly bullish forecast here at Federated Hermes still predicted a loss of 5.5 million jobs.
The unemployment rate (U-3) improved to 13.3% in May, down from 14.7% in April, the single worst month for the labor market since record-keeping began in 1939. The Bloomberg consensus was expecting a surge to 19% in May. The labor impairment rate (U-6), also known as the underemployment rate, is a better and broader barometer of the labor market. It improved to 21.2% in May, down from its record high of 22.8% in April. Moreover, the household survey rebounded with a powerful gain of more than 3.8 million jobs in May, compared with a record decline of nearly 22.4 million jobs lost in April.
Worst is behind us While we had forecasted that April’s downwardly revised loss of 20.7 million jobs (the largest in U.S. history) would be the trough of this painful employment cycle, it’s clear the country has reached an inflection point much sooner than expected. The government made the difficult decision to shut down the U.S. economy in March to contain the coronavirus pandemic and save lives. In May, some parts of the country slowly reopened, and about 3 million of the 18 million people who were furloughed returned to work. This process should accelerate over the summer, if the trajectory of coronavirus infections and mortality continues to grind lower and progress is made on developing a vaccine.
Labor market internals strong Private payrolls gained an impressive 3.1 million jobs in May, up from a staggering loss of 19.7 million in April. The Bloomberg consensus had expected a loss of an additional 6.75 million last month. This means that government hiring suffered losses of 585,000 jobs in May, with local and state governments bearing the brunt of the damage with losses of 487,000 and 84,000, respectively. If schools reopen in August and September, however, many of these education-related positions should be filled.
Manufacturing added 225,000 jobs in May after losing more than 1.3 million in April, and construction gained 464,000, compared with a loss of 995,000 in April. As malls and stores began to reopen, retail brought back 368,000 jobs in May, after losing almost 2.3 million jobs in April. Perhaps the most astonishing improvement came in leisure and hospitality, which rehired more than 1.2 million workers in May, after losing more than 7.5 million jobs in April. Consequently, the growth in average hourly earnings in May slowed to 6.7% year-over-year, compared with a record high of 8% in April, as many of these low-wage jobs skewed the average lower. Average weekly hours worked soared in May to 34.7 from 34.2 in April, important because every 0.1 hour increase equates to about 350,000 people added to the labor force.
ADP and claims foretold May’s strong payroll report The ADP payroll survey reported that private sector employment decreased by 2.76 million jobs in May—far less than the expected loss of 9 million and April’s dreadful reading of 19.6 million. Initial weekly jobless claims (an important leading indicator for the labor market) have plunged 73% over the past nine weeks, from a peak of 6.867 million on March 28 to 1.877 million on May 30. To be sure, we have added a gruesome total of 42.7 million initial claims over the past three months, meaning roughly one out of every four workers have lost their job due to the coronavirus pandemic. But surprisingly, continuing claims have fallen 14% over the past two weeks, from their peak at 24.9 million on May 9 to 21.5 million on May 23.
Powerful equity market risk-on response As a forward-looking discounting mechanism, the stock market, like a trusty bloodhound, had already sniffed out this hugely favorable trend. The S&P 500 capped a powerful 46% rally over the past 11 weeks with a surge of more than 2% today. Measured from the equity market’s intraday bottom on March 23, this marks the largest 50-day rally in the history of the S&P. According to our research friends at LPL, following the other largest 50-day rallies in history, stocks were higher 100% of the time six and 12 months later, with average returns of 10.2% and 17.3%, respectively. That’s consistent with our economic and financial-market forecast here at Federated Hermes, as we expect a sharp second-half rebound in 2020 continuing into 2021. The NASDAQ composite has already rallied to record highs, the small-cap Russell 2000 has outperformed the S&P by 10% since the mid-March bottom, and the yield on benchmark 10-year Treasury has spiked from 65 to 95 basis points just this week.