Nonfarm Payrolls May 2020

Good news has arrived for the US economy, officially. US jobs payrolls increased by a stunning 2.5 million in May! No one saw this kind of report coming. The headline number in and of itself is incredibly impressive. Underscoring the strength of this report is the backdrop of dismal data that we had seen leading up to today’s data release from the Bureau of Labor Statistics. Both the official unemployment rate and U6 rate declined in the month of May to 13.3% and 21.2% from April levels of 14.7% and 22.8% respectively. The average American workweek ticked higher to 34.7 hours as hourly wages dropped 6.7% year over year. Interestingly, the dissidence in these data points can largely be attributed to the “type” of hiring that has occurred, which has been at the lower end of the pay scale. To illustrate, leading the way in terms of hiring activity was hospitality and leisure adding 1.2 million jobs. Also noteworthy is government payrolls shrinking by ~585,000 last month whereas private payrolls increased by more than 3 million.  Of course, the error term inherent in this report is substantially higher than usual and the effect of the PPP program could have easily biased results higher.

The Federal Reserve meets next week; this report will certainly impact deliberations as we have monetary policy and fiscal stimulus currently working hand in hand on a global scale and supporting investor risk appetite. It is unlikely that the Fed would do anything to tighten financial conditions particularly at this stage. Though today’s data could easily be construed as a sort of economic inflection point, it is also worth noting that the economy has much to prove. Mr. Powell will likely voice his commitment to the recovery, erring on the side of further support to the economy. The Fed, of course, has done some heavy lifting in the past couple of months by adding liquidity and supporting asset prices; Congress in turn has dialed up fiscal support. Meanwhile, central banks and governments around the world have acted in lockstep to support financial markets in their local economies.

Heading into today’s report, the mood was somber. Everyone was attempting to determine how bad the number would be and the extent to which joblessness had increased. ADP suggested May’s job losses totaled 2.76 million earlier in the week and that was considered “good news” in light of recent data. So much for that! 2.5 million jobs gained in concert with sound internals is without question a positive surprise. While our hope is that employers continue to add jobs across sectors, we would caution that job gains being so heavily concentrated in leisure and hospitality does give us some pause. Coincidentally, leisure and hospitality is exactly where the pain of COVID-19 was the most acute in recent months. We would posit that changing consumer and business behavior is significantly different than impairing it. The big question in our minds is where unemployment settles, as we gauge the path and pace of recovery. Will the US economy ultimately achieve what we had come to know as “normal” employment?                  

Market Outlook: Neutral USD, Neutral Duration, Neutral Equities