Making sense of latest jobs report
In a startling reversal, the Labor Department reported that the economy added 2.5 million jobs in May, versus the 8 million drop that was expected. The report may signal that the worst of the economic impact from coronavirus occurred in April, when 20.7 million Americans were sidelined.
But just because the worst is over does not mean the economy is set to return to prepandemic levels anytime soon. In other words, let’s not pop the champagne and celebrate just yet — there are a lot of aspects of the report that underscore that we have a long way to go.
The monthly jobs report is compiled from two separate surveys: one asks businesses whether they have hired or cut positions; and the other asks households whether or not they were working in the previous month.
The latter is the data from which the unemployment rate is determined. But it can suffer from some technical issues, which result from the reasons that respondents say they are not working.
The U.S. Bureau of Labor Statistics reported that the unemployment rate dropped to 13.3% in May, from 14.7% in April. However, the Labor Department warned that the rate could be understated. That’s because a large number of workers who were classified as employed but absent from work due to COVID-19 were NOT counted as unemployed. According to economist Joel Naroff, “the questionnaire allowed for a response that would essentially classify those workers in the same way as those on vacation, on jury duty or taking care of a relative. As a consequence, there was a huge undercount of those unemployed.”
The Labor Department spelled out the problem at the end of the report, saying that if those workers were properly classified, “the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis).” Monthly reports are subject to two subsequent revisions, so don’t be surprised if these numbers change.
As always, it is better to keep an eye on the broader unemployment rate, which includes part-time workers who seek full-time work (10.6 million, up by 6.3 million since February) and those who gave up looking for jobs, because it is a better measure of what’s going on in the economy. That rate stands at 21.2%, down slightly from an all-time high of 22.8% in April — but higher than the previous peak of 17.2% during the Great Recession.
Although many are hoping for a quick turnaround in the second half of the year, companies may not rush to rehire. Instead, they will wait to see whether demand increases enough to justify bringing back workers. The recovery will be significant, but it may not be strong enough to bring back all of the 20 million unemployed to the labor force. According to the nonpartisan Congressional Budget Office (CBO), the economy is likely to be 5.6% smaller in the fourth quarter of 2020 than a year earlier — a massive markdown from its projection of 2.2% growth made at the end of 2019 before the pandemic.
Diane Swonk, chief economist at Grant Thornton, says she believes the economy will come back from “the rock-bottom lows of April,” but the rebound will be “sluggish” — more sluggish than CBO’s estimates. By the end of the year, she forecasts the economy will “contract by 9.4 percent on a fourth-quarter to fourth-quarter basis, the worst since 1946 when millions returned from World War II. We do not expect the economy to cross the previous peak in overall economic activity until the second quarter of 2022.”
For now, let’s put the champagne back in the refrigerator.