Economics

A Mixed Jobs Report Illustrates Continued Labor Struggles

Job Growth and Labor Participation Disappointed in May

Zions Bank Jun 4, 2021

U.S. employers added 559,000 jobs in May and the unemployment rate dropped to 5.8%. The May jobs report showed a labor market that is slowly improving, although not as quickly as many had hoped or expected. An unexpected drop in the labor force participation rate is a sign that more people are deciding to leave the labor market altogether, which could constrain the labor recovery and hold back economic growth.

Top Takeaways from the Report

Muted Growth

The U.S. labor market continues to struggle to recover from the historic recession caused by the Coronavirus pandemic. In May, 559,000 workers returned to jobs in America. In a normal economy, this would be outstanding growth and May jobs growth showed a marked improvement over weak April job gains. However, there are still 7.6 million fewer jobs in the economy than before the recession hit in early 2020. At this pace of recovery, it would take another 14 months just to return to pre-pandemic employment levels. The May employment growth was also slower than the consensus expectation that 645,000 jobs would be added in the month.

The U.S. unemployment rate dropped to 5.8% in May, down 0.3 percentage points from the previous month. This is normally a good sign that the job market is moving closer to “full employment”. However, the labor force participation rate unexpectedly dropped to 61.6% in May. A strengthening labor market should see unemployment falling and labor participation increasing, as a strong economy pulls more people off the sidelines and into jobs.

The drop in the participation rate means that, even with increasing demand for workers, more people are deciding to leave the labor market and go back on the sidelines. This is causing more stress to employers who are already struggling to find workers. And these labor shortages could hold back potential economic growth. If companies can’t find the workers they need, they will have to pull back on the goods and services they produce.

Inflation is Building

One of the results of a tightening labor market is increasing wage pressure, and this is apparent in the jobs report. Average hourly earnings were expected to increase 0.2% in May. However, the actual monthly wage growth came in at 0.5%, more than twice as high as anticipated. This wage pressure is consistent with a tightening labor market, as employers must compete for a diminishing pool of available workers.

While wage increases can be considered a benefit to workers, when coupled with other economic indicators they are pointing to higher inflationary pressures. The consumer price index, one of the main inflation indicators, also unexpectedly jumped in its most recent report, increasing 0.8% over the previous month.

When the two reports are considered together, signs of inflationary pressures seem to be building. On the employment side, strong demand for labor, coupled with a low supply of available labor is causing strong wage increases. On the retail side, strong consumer demand, coupled with constrained supplies of goods, is causing price increase pressure. 


Growth by Industry

In May, notable job gains occurred in leisure and hospitality, in public and private education, and manufacturing.

The leisure and hospitality industry once again led job growth, increasing by 292,000, as COVID-related restrictions continue to ease. Most of the job growth occurred in food services and drinking places (+186,000). Even with the strong growth in leisure and hospitality, employment is still 2.5 million lower from its level in February 2020.

Education-related sectors also saw strong growth, adding 144,000 jobs in May as more students returned to in-person instruction. Local education saw the largest growth (+53,000), followed close behind by state government education (+50,000) and private education (+41,000). However, there are still 1.1 million fewer education jobs than there were in February 2020.

After large losses in April thanks to stalled automotive production, manufacturing gained back 23,000 jobs in May. Much of the growth can be attributed to growth in the motor vehicles and parts (+25,000) sector that was hit hardest by production challenges in April. However, even with decent monthly growth, manufacturing has 509,000 fewer jobs than it had in February 2020

Trade, transportation and utilities (+37,000), professional and business services (+35,000), and information (+29,000) also saw strong growth in May.

Construction was the only major sector to lose jobs month to month in May, losing 20,000 jobs. Despite strong housing price growth, there were still 225,000 fewer jobs in construction in May than there were in February 2020.

Food and beverage stores also saw a big loss with the sector losing 26,000 jobs last month. 

The Bottom Line

The May jobs report is further proof that a strong U.S. economic recovery remains elusive. While the overall job growth was more than twice as high as the previous month, it was lower than expected. As the unemployment rate dropped, so did labor participation. And, even though wage growth was strong, when coupled with signs of high price increases it points to increased risks of inflationary pressure.

The main question at this stage of the economy is whether the trends we’re seeing are temporary (caused by hiccups as the economy restarts) or whether they are signs of building pressure. The consensus opinion of the Federal Reserve is that these indicators are transitory and that they will subside as economic conditions improve. However, if these indicators are not transitory and instead are part of an emerging trend, this could force more aggressive countermeasures if inflation continues to build over the intermediate term.

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The division of Economics and Public Policy at Zions Bank informs and educates employees, clients, and the community-at-large by providing insight and analysis on issues related to local, national and global economic trends as well as federal banking policies. The primary goal of the Economic and Public Policy team is to help individuals and businesses understand important issues that can impact their daily financial decisions. For more information and analysis, please visit www.zionsbank.com/economy.

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