May Jobs Report Shocker

In a startling reversal, the Labor Department reported that the U.S. economy ADDED 2.5 million jobs in May, versus the 8 million drop in payrolls 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. There were strong gains at food and drinking establishments, which added 1.4 million jobs, more than half of the total.

The unemployment rate dropped to 13.3 percent in May, from 14.7 percent in April, though the Labor Department warned that the rate could be understated. The reason is a large number of workers who were classified as employed but absent from work were NOT counted as unemployed. If they “had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported.”

It may be that the broader unemployment rate (U-6), which includes part-time workers who seek full time work and those who gave up looking for jobs, is a better measure of what’s going on in the economy. That rate stands at 21.2 percent, down from an all-time high of 22.8 percent in April.

We were all bracing for horrendous numbers, so this report was indeed a shocker. Prior to the release, economist Joel Naroff noted, “The economy is reopening and we are starting to see the economic numbers look less ugly.  Not, they are not good, but terrible can be an improvement from horrendous, so I will take it.”

There are still 20 million Americans who are out of work, a number that should take our collective breath away. Consider this: nearly one in four workers have applied for unemployment insurance benefits since the financial fallout from the pandemic began. Unfortunately, as some are slowly returning to work, others have been left high and dry. A recent analysis from Bloomberg found that almost one-third of unemployment claims have not yet been paid. The estimated outstanding amount due is approximately $67 billion in unpaid benefits.

Even if April turns out to be the peak month in terms of layoffs and rate, Naroff warns “the decline could be slower than many expect,” as companies wait to see whether demand rises enough to justify bringing workers back on the payrolls. Yes, the economy is likely to snap back from Depression-era lows in output during the second quarter, but how quickly the pace increases in the second half of the year will be critical to the labor market.

When the nonpartisan Congressional Budget Office (CBO) updated its 10-year (2020-30) economic forecast, it acknowledged the brutal reality of coronavirus: CBO now expects U.S. GDP to be 5.6 percent 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.

CBO also projects that over the next 11-years, the impact from the virus will reduce U.S. economic output by a cumulative $7.9 trillion (in 2019 dollars), or 3 percent of gross domestic product. Shockingly, GDP isn’t expected to catch up to the previously forecast level until the fourth quarter of 2029, the CBO added.