Nuance is key to reading May’s jobs report

The U.S. labor market added 272,000 jobs in May, surpassing expectations, but unemployment rose to 4%. Why the discrepancy? Two different surveys tell the story.

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Jun 20, 2024

The U.S. labor market added 272,000 jobs in May, well above the 200,000 expected by many economists. At the same time, unemployment ticked up to 4%, marking the first time we’ve hit that symbolic level of unemployment since January 2022.

Two surveys, two stories
Why are job gains looking so strong while unemployment continues to tick up? The answer lies in the surveys.

The monthly jobs report’s two headline numbers—job gains and unemployment rate—come from two separate surveys that tell different stories at the moment.

Let’s break down the differences. Job gains (the monthly change in nonfarm payroll employment) and wage growth are based on a survey of around 120,000 businesses (the “establishment survey”) about headcount and compensation. However, the unemployment rate (a component of the labor force) comes from a survey of 60,000 households (the “household survey”) about labor force status – whether members of the household are employed, unemployed, and looking for work or out of the labor force.

Over the long term, these surveys look very similar and tell the same story. However, they can diverge over shorter periods, month-over-month, or even year-over-year, just as we are seeing right now.

Looking at May’s employment data, it’s clear why these two surveys can cause confusion. According to the establishment survey, the economy added 272,000 jobs last month, but the household survey shows a loss of 408,000 jobs.

It’s important to remember that month-to-month volatility is relatively normal, and the 41 straight months of job growth (according to the establishment survey) are the anomaly. During the five years before the pandemic, job gains ranged from a low of around 20,000 jobs lost to a high of nearly 400,000 jobs added in the strongest month. The first month of job losses will earn some hyperbolic headlines, but it could be a sign of a return to more normal labor market trends.

So, which data should we trust?

As with most things, the answer likely lies somewhere in the middle. Both surveys provide valuable insights into the labor market.

The establishment survey may be painting a rosier picture of the labor market that doesn’t necessarily portray what many workers and businesses are experiencing, as we’ve discussed many times in this column (here and here and here). However, it’s also unlikely that job losses (if there were any) match what the more volatile household survey is showing.

From the 30,000-foot view, the labor market has been stronger and more resilient than anyone predicted, but it’s unlikely the past year was not as hot as initial estimates suggested.

This report, and the focus on the household survey you may have seen in the media or on LinkedIn this month, is likely a more accurate reflection of what many businesses have been feeling in the labor market over the past year.

For many industries, hiring has been flat. They’re adding fewer new roles and backfilling open jobs at a slower pace. Businesses have been exercising caution, and the headlines are just starting to catch up.

A cooling economy could spell good news for the Fed

So, there may be many contradictions in the jobs report, but what stories are other data sources telling about what’s happening in the labor market?

In May, retail sales – a sign of consumer spending and demand – came in lower than expected. Sales rose just 0.1% from April to May. The challenge with the retail sales figures is that they are not adjusted for inflation. Therefore, when prices are falling, as is the case with gasoline, or rising more slowly, retail sales growth is slower due to consumers’ money going a bit further than when prices rose more quickly.

Inflation, specifically the Consumer Price Index (CPI), measures changes in the prices of key goods and services. According to May’s CPI reading, prices were unchanged from April—a welcome sign for consumers, business leaders, and anyone hoping the Fed will start to lower interest rates this year. While prices were unchanged month over month, they did rise by 3.3% year over year, well above the Fed’s 2% target.

While there are many signs the economy is cooling, the pace is likely not as fast as the Fed would like. The Fed began raising interest rates to stem inflation and, therefore, cool the economy back in 2022. The rate hikes worked to slow the pace of price increases, but inflation has been stubborn. Since late last year, future homeowners and borrowers have been hoping for interest rate cuts. And with the progress on inflation and slowing labor market, it’s looking like we will see one – maybe two – interest rate cuts this year.

What to expect for the second half of 2024?

Over the past several years, addressing turnover has remained the biggest challenge that HR and business leaders have mentioned. But there’s good news! One of the most unexpected developments of 2024 has been the quick decline in voluntary turnover, the share of workers quitting their jobs for new opportunities. Lower churn in the labor market can provide stability for employers looking to find a new normal. For employees, even though unemployment has ticked up, layoffs remain low.

The labor market appears to be rebalancing after several years of unprecedented growth. It’s a tougher market for job seekers, and many businesses feel things start to cool and normalize. However, rebalancing and normalization, in this case, mean that growth is slowing.

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