May employment report surprises Wall Street
The U.S. labor market is trying to work its way out of the economic devastation caused by the COVID-19 virus. In March, entire sectors of the American economy were forcibly shut down, taking with it tens of millions of jobs.
Two months ago, in April, the Department of Commerce’s monthly Employment Report highlighted the carnage. The national unemployment rate skyrocketed to 14.7%, the highest rate since the 1929-39 Great Depression. The economy lost 20.7 million jobs, the largest monthly decline in American history. April’s massive job loss wiped out all job gains for the U.S. economy over the past 10 years, including the more than 6.5 million jobs created from 2017-19.
But May’s Employment Report provided some respite to April’s punishing numbers. States have increasingly begun to reopen their economies, fueling an initial surge of people returning to work. The unemployment rate fell to 13.3% while 2.5 million jobs were added. May’s report surprised Wall Street, which expected the economy to lose an additional 7.7 million jobs and the unemployment rate to rise to 19.8%.
Despite the improvement, the latest report stands in stark contrast to just a few months ago. In February, the unemployment rate was at just 3.5% – a 50-year low – and the economy was averaging nearly 225,000 new jobs each month.
It may still take a few months before we start to see any consistent improvement in the unemployment rate. A number of heavily populated states, such as Illinois, California, New York and New Jersey, remain far behind in reopening their economies. The longer these states remain closed, the more permanent damage it will cause to their economy and labor market. Consequently, we could still get some further fallout from these metropolitan areas and states that could negatively weigh on the labor market.
Over the past three months, the economy has lost 19.6 million jobs, conveying the impact government-mandated restrictions are having on American businesses. Of the 11 economic sectors tracked by the Department of Commerce, the Leisure & Hospitality sector has fared the worse. In February, Leisure & Hospitality employed more than 16.86 million Americans, a record all-time high. Just three months later, in May, the sector had lost 7.04 million jobs, a decline of 41.8%. Leisure & Hospitality has suffered the worst decline of the 11 sectors in the past three months.
The other sectors with the largest respective job loss are Trade, Transportation & Utilities (-2.96 million), Education & Health Services (-2.34 million), Professional & Business Services (-2.16 million) and Government (-1.57 million).
We can’t expect businesses to be forcibly closed for 3-4 months, and in some states even longer, and then expect them to resume operations as if nothing happened. There’s going to be a lot of businesses that simply don’t reopen. For those that do survive, many may be forced to scale back the size of their operations. For others, because the damage done has been so great, their reopening may only last for a few months.
All things considered, May was a positive Employment Report. However, what we really need to see is a gradual, sustained improvement in these numbers.
Mark M. Grywacheski, Investment Advisor
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Quad Cities Investment Group, LLC is a registered investment advisor with the U.S. Securities Exchange Commission.
