DWS: Too good to be true? The US labor market miracle.

June 8, 2020

Christian Scherrmann, US Economist at DWS, comments on the latest US labour market figures.

'What are the odds? Virtually against all expectations, Friday’s labor market data has surprised significantly to the upside - beyond anything that seemed imaginable. The unemployment rate was reported at 13.3%, down from 14.7%. This mainly reflects a swift rebound in private sector employment, which increased by roughly 3 million. While the increase was broad based, the biggest gains were in the service sector, which added 2.4 million jobs in total. Gains were concentrated in the previously hard hit leisure & hospitality (1.2 million), education & health (combined 424 thousand) and retail (367 thousand) sectors. Taken together with a drop of average hourly earnings of 1 percent on the month, this suggests plenty of low-paid workers being re-hired.

The reopening of many states probably helped. However, the job figures appear to have been boosted by design features of generous government pandemic response programs such as the Paycheck Protection Program. This program foresees forgivable loans if certain criteria are met. Among them are keeping people on the payrolls “…or quickly rehiring employees and maintaining salary levels.” So, some of the seemingly splendid numbers may be due to temporary effects, rather than underlying economic momentum.

One tentative clue on the true state of the labor market could be in the so called U6 underemployment rate, still hovering at above 20 percent. The number of people working part time for economic reasons also remains close to April’s historical highs. And once again, the BLS admits measurement errors in the May report, stating that if people that are absent from work for “other reasons” had been classified as unemployed, the headline rate “…would have been about 3 percentage points higher than reported…” or just over 16%. All in all, today’s unemployment report really comes as a surprise. However, the most plausible cause is the effectiveness of the government response to the pandemic in encouraging rapid re-hiring. For a real confirmation of turnaround of underlying economic momentum, we will need to wait to see if the miracle can be replicated in coming months.'