The latest employment report came as a shock to Wall Street. And like all shocks — it produced a big reaction. In this case, an abrupt rise in stock prices in what looks to me like rampant short covering.
Moody’s Analytics’ chief economist gave the employment report a mixed review — good: the recession is over; disturbing: the 2.5 million employment gain will be revised away in future reports.
The gap between Wall Street expectations and the Bureau of Labor Statistics (BLS) report was enormous. Nonfarm payrolls were 10.8 million better than expected in May — with the BLS reporting a 2.5 million increase in May jobs while Wall Street estimated an 8.3 million job decline, according to CNBC.
The BLS reported a 13.3% unemployment rate — down from 14.7% in April and way lower than the 19.5% Wall Street expected — which would have been the worst since the Great Depression era.
Where did the jobs come from? As CNBC wrote, “Much of the gain came from those classified as temporary layoffs due to the coronavirus-related economic shutdown. Leisure and hospitality represented almost half the jobs gained.”
Moody’s conveyed what sounds to me like a mixed message. As Moody’s Analytics Chief Economist Mark Zandi told me in a June 5 interview, “I did expect an upside surprise to the May jobs number given the ADP report. But ADP expected a 3 million drop in jobs, not a 2.5 million increase.”
He sees a disconnect between the number reported by the BLS and other sources. “The up 2.5 million is not consistent with ADP or initial and continuing claims. Both initial and continuing jobless claims between BLS survey weeks signaled that layoffs continued in May and pointed to at least modest job losses during the month.”
He does not expect the 2.5 million jobs to stand the test of time. “My guess is the BLS May employment gain will ultimately be revised largely away. [Such revisions have occurred in the past]. During the financial crisis. The initially reported numbers were significantly revised lower. I’m not saying the job gain will be completely revised away, but I don’t think the job gain was nearly as large as currently reported,” he explained.
Zandi’s conclusion is optimistic. “But regardless, it is good news. The recession is over. The economy likely hit bottom in May. Also important to note that BLS said the unemployment rate is 16.6% after correcting from an ongoing problem they are having classifying workers absent from work due to the virus as unemployed.”
MIT’s Thomas Kochan Sees Actual Unemployment Rate Above 13.3%
Kochan estimates a much higher actual unemployment rate than what the BLS reported. “My reading of the full set of numbers is that the real unemployment rate is above 20%. That is, the official unemployment rate is estimated to be 13.3% but another 6% are discouraged or marginal workers who have given up looking for work. BLS also reports that another 3% were classified as employed but actually out of work for ‘other reasons.’ So somewhere between 20% and 22% of the labor force are actually out of work,” he said in a June 5 interview.
Kochan is nevertheless optimistic. As he concluded, “The good news is that re-employment is happening and that is why the official unemployment rate declined this month. So there is reason for optimism as we look ahead, that is, unless a second wave of infection occurs.”
Wharton Budget Model Sees Slowing Job Losses
A Wharton expert also sees things improving.
Diane Lim, Senior Advisor and Director of Outreach at the Penn Wharton Budget Model, said in a June 4 interview, “The dramatic pace of unemployment we've seen since mid-March won't go on forever and is in fact already slowing. The levels of new initial weekly unemployment claims have been coming down over the past several weeks. We should expect these new claims to continue to decline over the coming weeks and months as long as businesses continue to reopen and we avoid a public health set-back (resurgence of the virus) that forces governments to reinstate stay-at-home orders.”
Prior to the June 5 jobs report, Lim expected improvement in the jobs picture. “I think in real time we have probably already peaked in terms of the share of the workforce who have lost their jobs because of the pandemic. Based on the gross flows of initial unemployment claims to date, and the sense that gross has not been that much different from net while stay-at-home orders were in place, it's likely that in real time the true unemployment rate has peaked (probably in mid-May) at somewhere in the low 20s.”
Sadly she does not think layoffs are over. “I'd look to the higher education sector since many universities are reducing in-person, on-site classes/programs and suffering huge declines in revenue because of their inability to run their highest-revenue programs,” Lim said.
Nor does she interpret the June 5 BLS report as meaning "happy days are here again." As she explained in a June 5 interview, Beyond the fact that the May unemployment rate is 10 percentage points higher than where it was in February, the reason to delay celebrating is that “A lot of reemployed people are coming back to drastically reduced hours because their employers are only operating at drastically reduced capacity/volume.”
