The Unemployment Rate Likely Jumped in May, and That’s OK
Economists expect that job creation slowed last month, and with that loss of momentum, the unemployment rate will also likely tick upward. But this is not necessarily cause for alarm.
The headline numbers of the April Employment Situation Report from the Department of Labor were staggering, beating economists’ expectations handily. That month, the United States economy created 288,000 jobs, pushing the unemployment rate down 0.4 percentage points to 6.3 percent, the lowest in more than five years. The last time U.S. employers added more jobs was in January 2012. The “gains were widespread, led by job growth in professional and business services, retail trade, food services and drinking places, and construction,” noted the report. Additionally, the Labor Department’s economists upwardly revised March’s job growth from 192,000 to 203,000 — which is an important improvement, given how much anxiety the first quarter’s lack gross domestic product growth spawned. With that adjustment, the economy has added a monthly average of about 214,000 positions so far in 2014.
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Because April’s weighty jobs growth was largely result of the labor market catching up from the winter slowdown — which kept hiring numbers extremely low in December, weak in February, and undeniably sluggish in March — economists have predicted that May will see lower, but more sustainable, employment growth. Economists have predicted employers added 218,00 jobs to payrolls last month. As for the 0.1-percent expected increase in the unemployment rate, that jump is actually encouraging for the recovery because it means it will likely be driven by people entering the labor force in search of work, an indication that job hunters are becoming more confident in the health the labor market. By comparison, April’s 0.4 percentage point drop in the unemployment rate came from a sizable decrease in the labor force, meaning workers were still discouraged and unable to find employment. And that aspect of the jobs report was by no means surprising; a disheartened labor force and a record low labor force participation rate has characterized the recovery and is evidence that recovery has not yet reached all Americans.
The monthly National Employment Report prepared by payroll processor ADP and Moody’s Analytics also suggested that job growth slowed last month. The 179,000 jobs added by employers in May is a marked contrast from April’s strong post-winter rebound, when ADP’s tabulations showed payrolls expanded by 215,000 jobs, according to the firm’s recent revision. Yet, as ADP President and Chief Executive Carlos Rodriguez noted in the report, last month’s figure “is higher than May of last year and in line with the average over the past twelve months.”
May’s slowdown “was concentrated in Professional/Business Services and companies with 50 – 999 employees,” explained Moody’s Analytics chief economist Mark Zandi. In usual fashion, the service-producing sector led job creation, adding 150,000 workers to payrolls last month. Manufacturing added 10,000 positions, while construction created 14,000 new jobs. And, in terms of business size, large companies with 500 or more employees added 37,000 workers; medium-sized businesses with payrolls of 50 to 499 workers increased payrolls by 61,000 employees; and small firms hired 82,000 new workers.
ADP’s report is typically seen as a precursor to the Labor Department’s more authoritarian Employment Situation Report. But “the ADP report hasn’t done a particularly good job in signaling first prints in the [Labor Department] report,” JPMorgan Chase chief U.S. economist Michael Feroli told Bloomberg back in March, noting that “generally the ADP revisions have an uncanny ability to make first-print misses disappear.”
Still, ADP report’s report is closely watched because it does provide hints of overall job growth, given the two reports tend to move in the same direction. And, despite May’s slowdown, lately that direction has been up. But Moody’s Mark Zandi took a break from his previous optimism. “The job market has yet to break out from the pace of growth that has prevailed over the last three years,” he said in the report.
And that is a fair assessment; a quick examination of the Bureau of Labor Statistics’ six-year job creation graph shows that over the past three years, employment growth has oscillated dramatically, with positive trends lasting a few months at best. But, by comparison, his comments in earlier months suggested that he saw the labor market recovery stabilizing. Last month, he said the “job market prospects are steadily improving.” And in January — when ADP’s numbers showed employers added 175,000 jobs to payrolls — Zandi acknowledged that the month was not an “auspicious start” to 2014. However, he remained confident the United States was “still going to have a better year.” Now, he seems less confident that the job market is improving.
Still, it is true that the labor market has taken huge steps forward this year; even though ADP’s figure came in lower than expected, economists are not likely to modify expectations for a spring revival of the U.S. economy, after gross domestic product growth entered negative territory in the first three months of the year.
The Commerce Department’s first revision of first-quarter GDP put economic growth in negative territory, and the 1-percent contraction was weak even for an economy where normal growth is below 3 percent. The good news was that the economic contraction is not believed to be the beginning of a new trend. And the temporary downturn fits within a pattern seen throughout the economic recovery. Since the recession ended nearly five years ago, GDP very rarely achieved what economists call ideal growth.
Looking back to the first quarter of 2009, when GDP decreased 6.4 percent, recent data shows the extent to which the economy has rebounded, even if the recovery has both failed to grow consistently and remained slowed by historical standards. On average, the United States economy has grown at an annual rate of 3.3 percent since 1929. And, generally, economists say a healthy rate of growth for GDP is between 2 percent and 4 percent. GDP growth fell just within that range in the final three months of last year, but the first quarter posed another setback. And the uneven nature of the economic recovery can been seen in the ongoing weakness of the labor market, where high levels of joblessness has persisted even if the unemployment rate has ticked down.
However — while worker confidence remains low, wages stagnant, and long-term unemployment high — emerging unemployment is trended near pre-recession levels. Earlier this month, Americans filed the fewest number of first-time applications for unemployment benefits in seven years, meaning the last time jobless claims — and by association, emerging unemployment — fell so low was before the financial crisis and subsequent recession.
To any casual observer of the United States labor market hitting such a historic milepost would suggest recovery of the economy and the jobs market is well on its way to completion. And it is true that the strides forward the labor market has taken, especially in the past twelve months, cannot be discounted. Progress is steady but not without setbacks. Or as Pierpont Securities economist Stephen Stanley told Bloomberg, “the labor market is showing slight progress, but nothing dramatic.”
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