After a disappointing jobs report in April, May hiring picked back up, with 559,000 new jobs added. The figure was still less than consensus expectations of 650,000, but reflected a needed boost in the pace of hiring as total employment remains 5% lower than February 2020 levels.
The unemployment rate fell by a sharp 31 basis points to 5.8%, now within 2.5 percentage points of February 2020’s level. That improvement, however, was due to negative factors in addition to positive ones. The civilian labor force shrank by 53,000 in the month, with the participation rate declining slightly to 61.6%.
The unemployment rate is somewhat deceiving, as the level of slack in the labor market remains high. Including the number of those not in the labor force who still want a job and those working part-time who want full-time employment, the number of underemployed actually rose slightly in May and remains elevated.
Given this, recent fears of an overheating labor market appear premature. On a nonseasonally adjusted basis, net hiring was just shy of 1 million, the fourth consecutive month of job growth at this pace or greater. Accommodation and food services companies hired a stunning 220,600 employees in May, mostly in bars and restaurants, now growing by 9% over the first five months of 2021 alone. But employment in the sector remains 14% below pre-pandemic levels, so many of these jobs are simply rehiring temporary layoffs as dining establishments return to higher capacity and travel returns.
Similarly, arts, entertainment and recreation companies grew robustly in May, and jobs have expanded by 15% so far in 2021 but remain 21% below February 2020 levels. The 71,700 jobs added in May would have been an industry record in any month prior to COVID.
The government sector contributed the third-most job gains in May, adding 67,000 jobs. Hiring was concentrated in the state and local education sector, growing by a combined 103,000 jobs in May while government payrolls shrank elsewhere. Often a source of stability during downturns, remote learning and government budget constraints left a more pro-cyclical government hiring trend than typical.
Wages rose again in May, while the pace of wage growth slowed. Average hourly earnings for nonsupervisory employees have risen by an annualized 4.4% so far in 2021. While this is a positive sign coming so soon out of a recession, it does deserve some additional context. The 2021 pace of wage growth is healthy but in line with historical averages — far from running hot. Furthermore, a significant portion of the wage increases this year have been in leisure and hospitality, the sector with the lowest wages. Rather than evidence of a worker shortage, this appears to be catch-up from a fall in wages in 2020. The leisure and hospitality sector includes restaurants, bars and hotels, industries hit the hardest by the pandemic and among the most COVID-risky businesses now coaxing workers back.
In general, wage growth in 2021 has been relatively strong across sectors. The greatest acceleration of wages over 2021 compared to 2020, apart from leisure and hospitality, has been in mining and logging, a relatively small industry sector that has bounced back after pay cuts last year, and in transportation and warehousing, which were among the best performers during the pandemic with limited job losses and experiencing high demand. But these apparent pockets of tightness in some sectors does not yet imply labor tightness in the economy as a whole, as this stronger wage growth has indeed led to more rapid hiring.
Prolonged labor tightness may happen much sooner than it typically has after prior recessions given the rapid fiscal response to the downturn, but with 22 million people still wanting more work, it remains unlikely to broadly occur in 2021.
The Week Ahead …
Next week should bring more price signals about the U.S. economy via Thursday’s update on the consumer price index. The data for May should reveal how rapid shifts in reopening pace have had impacts on select sectors. The prior release included significant price increases in the hotel and used car sectors as activity picks up entering the summer months.
Elsewhere, the National Federation of Independent Businesses plans to release its "Small Business Optimism Index" for May on Tuesday. The trade group released the advanced figures for the month on Friday, which indicated 27% of firms plan to increase employment, surpassing the prior record set in August 2018 of 26%. The share of firms planning to raise compensation, meanwhile, rose from 20% to 22%, remaining below the historical peak of 27%.