Job Gains Beat Expectations in May, Unemployment Rises

Roy Maurer By Roy Maurer June 2, 2023

Employers in the U.S. added 339,000 new jobs in May, far surpassing expectations, and the unemployment rate increased to 3.7 percent, according to the latest employment report from the U.S. Bureau of Labor Statistics.

Hiring overall has slowed a bit from last year's pace but employment gains have remained strong despite the Federal Reserve's efforts to tackle inflation and slow the labor market through a series of interest rate increases.

The job tally marked the 29th straight monthly increase in employment. And March and April's totals were both revised upward for a net gain of 93,000 jobs.

"The U.S. labor market continues to demonstrate grit to thrive amid chaos," said Becky Frankiewicz, president and chief commercial officer at ManpowerGroup. "With 339,000 job openings in this blockbuster report, we're still rewriting the rule book and the U.S. labor market continues to defy historical definitions."

Richard Wahlquist, president and CEO of the American Staffing Association, said the labor market continues to be the bright spot of the economy. "While the unemployment rate rose to 3.7 percent, it remains near historic lows, and with more than 10 million job openings, American businesses are still hiring. It's time for the Fed to pause rate hikes and take the time needed to allow the effects of the past year's historically high rate hikes to take hold in all areas of the economy."

Andrew Flowers, lead labor economist at Appcast, commented that the latest data indicated that the perceived slowdown in hiring is happening more gradually than expected, if at all.

Daniel Zhao, Glassdoor senior economist agreed, noting that so far in 2023, payrolls have grown by an average of 314,000 monthly. "By contrast, in Q4 2022, average monthly payroll gains were 284,000. The often-predicted slowdown in the labor market has been slow to arrive."

Experts found conflicting signals—and even worrying signs—in the report. "Looking past the blockbuster figure of jobs added last month, there's a lot to be confused and even concerned about in this month's jobs report," said Nick Bunker, economic research director for North America at the Indeed Hiring Lab. "The large spike in the unemployment rate is the largest monthly increase since the early days of the pandemic as both more employed people entered unemployment and fewer unemployed people found a job. And an even larger and arguably more concerning spike in the Black unemployment rate threatens to reverse substantial gains made over the past few years."

Zhao said that on the positive side, strong jobs growth married with rising prime-age labor force participation and slowing wage growth gives assurance that the labor market is cooling gracefully. "However, the jump in unemployment and in permanent layoffs suggests that the labor market is feeling the pinch from layoffs this year," he said.

Julia Pollak, chief economist at ZipRecruiter, explained that while the employer survey indicated an enormous and very broad-based job gain, the household survey of workers indicated a decline in the number of employed people about as large, and a 440,000 increase in the number of unemployed people.

"Usually, economists put more stock in the establishment survey, because it is based on a larger sample and is less volatile," she said. "But the household survey has been more sensitive to the start of economic downturns."

Many economists still expect a recession later this year or early next year.

Industry Breakdown

Industry gains for the month were once again broad-based. Professional and business services led job creation with 64,000 new jobs, followed by government (56,000) and health care (52,000).

"Professional and business services, which towards the end of last year slowed enough to suggest an imminent 'white collar recession,' has completely rebounded," Flowers said. "On the other hand, the leisure and hospitality sector, which has been a powerhouse in post-pandemic growth, seems to be moderating."

Leisure and hospitality employers added 48,000 new jobs. "The most resilient sectors include leisure and hospitality, as consumers are indulging in summer travel and eating out, creating hiring demand," Frankiewicz said. "Retail shows hiring confidence as well, with demand for more supervisors up."

Retailers added over 11,000 jobs in May, while construction (25,000), and transportation and warehousing (24,000) also posted solid employment gains.

"Fatigue is setting in for tech companies and larger enterprises across the board," Frankiewicz said. "Our data shows cooling in IT, with posted roles down 12 percent compared to last month. Yet those let go are being quickly reabsorbed, often into midsize companies."

The information sector, which contains technology companies, posted a loss of 9,000 jobs in May. Manufacturers reported a loss of 2,000 jobs.

Unemployment Creeps Up

The unemployment rate rose to 3.7 percent in May from an historic low of 3.4 percent the previous month. It is the highest jobless rate since October 2022 but still considered historically low.

An alternative measure of unemployment that encompasses discouraged workers and those holding part-time jobs for economic reasons also edged higher to 6.7 percent.

"The share of unemployed coming from permanent layoffs also rose modestly to 26 percent from 25.5 percent," Zhao said. "This figure has been elevated over the last three months in a sign that white-collar layoffs in 2023 may be modestly boosting unemployment."

He added that labor force participation—flat at 62.6 percent—is still below the pre-pandemic level of 63.3 percent. "This discrepancy is largely due to the aging population," Zhao said. "When looking at just workers ages 25 to 54, the prime-age labor force participation rate is now at the highest level since January 2007."

Flowers said prime-age labor force participation, at 83.4 percent, indicates that there's "still room to grow labor supply, perhaps to fuller employment," he said.

Wage Growth Slows

Low unemployment has put pressure on wages as employers compete for scarce workers. Average hourly earnings, a key inflation indicator, rose 0.3 percent for the month, and increased 4.3 percent compared with a year ago.

"Year-over-year growth in average hourly earnings decelerated in May, down from 4.4 percent," Zhao said. "While wage growth has slowed from its 2022 peaks, the Federal Reserve likely sees the need for more deceleration to achieve their goals of lower inflation. Today's report with strong job gains and above-target wage growth likely encourages the Fed to keep future hikes as an option in their back pocket."

Pollak said one of the best things about the pandemic labor market has been the career boost low-wage workers have received. "Labor shortages drove businesses to raise wages and reduce requirements, allowing low-wage workers to migrate into higher-paying occupations, and giving the bottom 10 percent of earners a large increase in earnings, even after inflation."



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