May’s jobs report surprise masked weaknesses that could make the rebound a ‘head fake’

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To paraphrase Mark Twain, reports about the labor market’s recovery may be greatly exaggerated.

The U.S. is undoubtedly in the throes of a deep recession fomented by the coronavirus pandemic. Yet Friday’s nonfarm payrolls report showed employers added a stunning 2.5 million jobs in May — a shock to the system for a market convinced the world’s largest economy was in freefall.

There were certainly reasons to be cheerful about the data, among them a sharp rebound in leisure and hospitality, hammered by COVID-19 restrictions that only recently began to loosen. The unemployment rate also posted a surprise drop to 13.3% from a post-war high, while the labor force participation rate jumped.

The numbers underscored how massive monetary and fiscal stimulus have undergirded the economy, while cementing expectations of a faster-than-anticipated recovery.

And therein lies the risk, according to Mohamed El Erian, chief economic adviser at Allianz, who warned of a potential “major head fake” that could lessen the appetite in Washington for more economic support.

In theory, the May report might be “picking up the impact of data distortions and policy distortions” that could make Congress do less, he told Yahoo Finance on Friday. “That’s the nightmare scenario.”

Several economists noted that black unemployment rose as joblessness among whites fell. Additionally, May’s “startling” hiring boom masked a hemorrhaging in a government sector that shed over half a million jobs, Ian Shepherdson, Pantheon Macroeconomics’ chief economist, said on Friday.

Given that at least 40 million people have lost their jobs since March, “the level of payroll employment is now at its late 2011 level. The way back is long,” Shepherdson said.

Meanwhile, workers’ average hourly earnings tumbled by 1.0% at a rate well below consensus, underscoring how employment gains aren’t translating into fatter paychecks — a persistent concern even before the COVID-19 crisis hit.

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