The latest monthly jobs report may offer investors clues into key market themes including a potential labor shortage, the next steps for the Federal Reserve and what it might mean for inflationary pressures. (Please see our latest report Inflation in the U.S. Economy for more insight into why the labor market may be a key driver of inflation.)
On Friday the U.S. Labor Department released the May employment report. It seems odd to call a gain of 559,000 a “weak report”, but with the economy still some 7.6 million jobs below pre-pandemic levels, the pace of gains over the last two months is disappointing.
Most of the time when payroll gains are poor, it reflects weak demand for labor. Right now, however, we have a labor supply issue, which may have different implications for markets.
Here are some important takeaways for investors:
The labor shortage is real
We usually assume the vast majority of people who are unemployed would like a job but just can’t find one. In the current environment, though, it seems obvious that a lot of companies want to hire, so labor demand does not appear to be the issue.
The Labor Department’s official job openings survey recently surged past its pre-COVID level and is now at an all-time high as a percentage of the total labor force. Arguably labor demand is as strong as it has ever been. It appears that the problem is that people who could work just don’t want to. The question then becomes whether this is a temporary condition or a more lasting one.
Help Wanted
Job openings have now surged past pre-pandemic levels and are at all-time highs as a percentage of the labor force.
Source: Bureau of Labor Statistics Job Openings and Labor Turnover Survey. Total nonfarm payroll. Dates 1/2011 – 4/2021 (preliminary).
Extra unemployment payments may only be a small and temporary reason for this
A lot has been made of the fact that some subset of workers were making more money collecting unemployment than they were working. This was due to a supplemental $300/week that was part of the stimulus bill passed at the start of this year. These extra payments are probably influencing some people’s willingness to work, but how pervasive is it?
It is impossible to know for sure, but it seems very likely that any effect from extra unemployment insurance payments is waning. With the $300/week extra payments, the break-even wage rate to go back to work is about $16/hour. If you are offered a job making more than $16/hour, than you may be better off taking the job. For the record, the 25th percentile worker makes $16.42, so basically 75% of jobs out there pay more than this break-even wage according to the Bureau of Labor Statistics.
Second, the $300/week is only available as long as someone remains eligible for unemployment payments at all. In most states this is 26 weeks. So in most cases, if you lost your job anytime in calendar year 2020, you either already have or are about to lose your benefits period. The last time Initial Jobless Claims were rising was late January according to the Department of Labor, so we could mark that as the most recent time layoffs were on the rise. This means that most of the people laid off at that time would only have four weeks or so left on their claims.
Finally, the job growth over the last two months has come in lower wage sectors. Bureau of Labor Statistics data indicates that the three largest percentage job gains in May were Entertainment/Recreation, Accommodation, and Food Services. Those same three were the largest gainers in April as well. It's the other sectors that aren’t growing much.
All of this suggests that stimulus is probably a minor issue holding back labor supply. There’s almost no way this alone explains why the labor force is still 3.5 million people short of the pre-COVID level. To the extent this is influencing labor supply, the effect should be diminishing rapidly. In May, 25 states announced they would be ending the supplemental unemployment benefits early, and the program ends for everyone in the beginning of September.
Fed policy may now be more uncertain
The Fed has been operating on the implicit assumption that everyone who was employed in February of 2020 would still want a job once the pandemic was over and the economy healed. If that is the assumption, then I do not think a figure like the official unemployment rate is that helpful, because that calculation excludes people who have dropped out of the labor force.
This doesn’t change anything for the Fed in the sense that they were always waiting to see Core personal consumption expenditures (PCE) get meaningfully above 2% for some period of time before hiking (please see page five of the report for more insight). However, Fed chair Jay Powell can no longer assume there will be many months of strong labor gains before wage pressure becomes a serious challenge.
Instead of pushing Fed hikes further out into the future, this latest data may actually make the timing much less certain.
Implications for markets and inflation
A growing labor force is key for general economic growth, especially growth without inflation.
For bond yields, on the net this jobs report may raise, not diminish, concerns about inflation. The closer we are to capacity in the economy, the more proximate risk inflation becomes. While predicting inflation is always difficult, the strong demand for labor in this report suggests that at the very least the risk has gone up.
Please see our latest report Inflation in the U.S. Economy for more insight into why the labor market may be a key driver of inflation. 
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