On May’s Big Jobs Shock

Surprise! Early Friday morning, the US Bureau of Labor Statistics unveiled its May US Employment Situation report. In a development that shocked nearly every analyst, US employers added—yes, added—2.5 million jobs.^[i] In our view, it is a sign the gradual economic reopening in the month is starting to pay predictable dividends, if a bit earlier than most expected. While we don’t think jobs themselves are much of a reason to get bullish (or bearish) on stocks, we think the scope of the positive shock illustrates just how much negative sentiment is baked into markets now.

To put the scope of this surprise in perspective, consider analysts’ estimates coming into the day. According to FactSet, they estimated US employers would cut nonfarm payrolls by a whopping 8 million jobs in the month.^[ii] They expected the headline unemployment rate to surge from 14.7% in April to 19.6%. Bloomberg’s survey matched the job cuts and projected a slightly higher unemployment rate, 19.7%.^[iii] No analyst they polled projected an improvement in either figure. MarketWatch’s survey was slightly more sanguine, with the consensus expecting 7.25 million job losses and a 19.0% unemployment rate.^[iv]

So to say that the 2.5 million nonfarm jobs added—3.1 million private sector jobs—was a surprise is an understatement.^[v] It is also, to use a COVID-era cliché, unprecedented: Prior to May 2020, the biggest gain in nonfarm payrolls was September 1983’s 1.11 million; for private payrolls it was the same month’s 1.09 million.^[vi] The headline unemployment rate dropped to 13.3%, with the broader U-6 rate (which includes unemployed workers who haven’t sought work in the last four weeks and those working part-time for economic reasons) falling from 22.8% to 21.2%.^[vii]

Digging deeper, it is clear that the seemingly obvious answer—economic reopenings gradually spreading in the month—was responsible for this. For one, the ranks of temporarily unemployed workers fell by a whopping 2.7 million.^[viii] Further, industries barred from activity by lockdowns led the gains. Restaurants and food services establishments added 1.4 million jobs—bouncing back from the massive 6.3 million they shed in March and April combined. Construction jobs were the second-biggest gainer, with May’s 464,000 hires bouncing back from April’s 995,000 job cuts. Healthcare was next biggest—most specifically, dentists and physicians’ offices, which added 369,000 jobs. All these areas, especially healthcare and restaurants, were among the most affected by lockdowns. As they ease, jobs should jump.

But it is clear these effects began sooner than analysts thought. Most responded to the news with varying degrees of shock. Some theorized it may be a technical snafu, although we think Canadian job gains—which totaled 289,600 in May—render that an unlikely answer. Many questioned the gains’ sustainability, particularly if a second COVID wave emerges. Some point out the fact unemployment remains shockingly high now—a fair, if backward-looking, point. Others argue the recent protests and turmoil on many American streets will hamper hiring. But the most common reaction, from what we have seen, is worry that it means the Fed and Congress may feel less pressure to keep the “stimulus” flowing—a classic “Pessimism of Disbelief” morphing of positive news into negative news. In our view, what it actually shows is stimulus pales in comparison to the power of letting businesses reopen.

Now, as we often write, unemployment and jobs data are typically late lagging—not very relevant for formulating a market or economic outlook. That holds here. Regardless of how you may feel (fearful or optimistic) based on what is quite obviously good economic news and a start to bringing down high unemployment, it shouldn’t factor into your expectations for markets now. However, it is an excellent demonstration of the vast negativity priced into markets now. The lingering skepticism, doubts and pessimism suggest a lot more of that remains.