May’s surprising jobs report: Unemployment rate drops

The American economy added 2.5 million jobs in May and the unemployment rate fell to 13.3 percent, according to data released Friday morning by the Bureau of Labor Statistics.

That’s still the highest level the United States has seen since the Great Depression, a reflection of the damage that Covid-19 and lockdowns have inflicted on the economy. But it also represents a bounce back from last month’s rate of 14.7 percent. And to be clear — it’s a huge and somewhat puzzling surprise.

Consensus forecasts called for something like 7 million additional job losses in May, based largely on inferences from the sizable number of new unemployment insurance claims that continued to pile up throughout the month. Expectations were that the economy would start bouncing back once restrictions on business activity were lifted, but the way the monthly jobs report works is that the surveys are based on a reference week and would have been conducted around May 12, which is before most reopening happened.

Betsey Stevenson, the former chief economist at the US Department of Labor and a member of the Obama administration’s Council of Economic Advisers, did see the possibility of something like this happening, writing on May 9 that “if more workers are brought back from furlough..than were laid off in the second half of April and early May, then non-farm payrolls could even start to climb.” But if you want to understand how genuinely shocking these results are, Justin Wolfers, a University of Michigan economist who happens to be Stevenson’s husband, said this strong May bounce back is something “no one saw coming.”

Meanwhile, the actual level of unemployment remains frighteningly high — worse than during the worst moments of the Great Recession. That said, the effects of rampant unemployment have been somewhat blunted as a large share of the non-working population has been able to avail itself of unemployment insurance benefits. These benefits have been made $600 per week more generous than usual, meaning most low wage workers actually get more from UI than they got from their jobs. Back in April, the conjunction of those enhanced UI benefits with the $1,200 stimulus checks most people received meant that personal income rose even as joblessness soared.

Meanwhile, restrictions on business activity started to lift in late May and are now, at least, partially rolled back across the country. Data from airline bookings, OpenTable restaurant reservation metrics, and many other available sources of information suggest we are seeing a significant bounce back in activity as restrictions lift.

The big issue is that in the early stages of a recovery, a trajectory that bounces all the way back to pre-pandemic levels and a trajectory that bounces back to 90 percent of pre-pandemic levels look pretty similar. But that still means a sustained 10 percent fall in economic activity, which is pretty significant.

The Congressional Budget Office is currently forecasting a rapid partial recovery followed by a prolonged stall that would leave the jobless rate much lower than it was in May, but about as high as it was at the peak of the Great Recession.

Congressional Budget Office

And the unusually generous unemployment benefits are set to expire at the end of July — meaning that while we should see a lot fewer unemployed people by August compared to May, they will be experiencing a lot more economic hardship. Pair that with looming crises in state and local government budgets, and the US could be facing a big second wave of economic pain in the fall unless Congress acts to provide additional relief.

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