A tale of two economies

June 7, 2024

Payroll employment rose by 272,000 in May, after a downwardly revised 165,000 for April. Public sector employment rebounded by 43,000 after a lull in April. Those gains were driven by gains at the local level in both education and noneducation jobs. Some states are beginning to ramp up hiring for universal preschool, while infrastructure projects are ongoing. 

Private sector payrolls continued to be driven by robust gains in hiring in healthcare and social assistance, which expanded by 83,500. Hiring in nursing and residential care facilities remained strong but is close to 100,000, below the levels of February 2020. This has been one of the slowest sectors to recover and is benefitting along in with in-home healthcare from an influx of migrant workers.  

Gains in leisure and hospitality jumped by 42,000, after a lackluster April. Air and car travel during the Memorial Day Holiday reached record highs. Those out and unable to work due to vacation hit a record for the month of May. We have not lost our wanderlust after enduring quarantines. 

The three sectors together – state and local, healthcare and social assistance, and leisure and hospitality – accounted for nearly two-thirds of total employment gains. That is down slightly from the pace of the second half of 2023 and the first quarter but still strong. The good news is that employment gains have become more broad-based in the first half of 2024. 

Professional and business services rose by 33,000, with gains in full-time hires offsetting a drop in temporary help. This is a sector that saw a rise in new business formation in 2023; we are now reaping those gains in hiring. Much of the increase was in technical consultancies spawned by the introduction of generative AI (GenAI).

Construction employment rose by 21,000, largely in non-residential specialty trade, which includes interior work on everything from retail to offices and data warehousing centers. Manufacturing employment rose by a moderate 8,000, with nondurable goods offsetting weakness in durable goods. 

Motor vehicles and parts were the outliers, despite an overhang of inventories on dealer lots. Imports of motor vehicles and parts have surged in recent months ahead of tariff announcements on EVs affecting certain type of batteries and computer chips; that is also showing up in manufacturing activity. Vehicle sales picked up in May but remain below the pre-pandemic peak due to hurdles in affordability. Incentives for vehicles are on the rise.

Smaller gains occurred in retail, transportation and warehousing and financial services. Retail was heavily concentrated in building materials and garden supply stores. Retailers have reported a shift back to online spending in the wake of increases in the price of gasoline. 

Average hourly earnings jumped by 0.4% in May, double the pace of April. That translates into a 4.1% gain from a year ago, 0.1% faster than the pace of April. Gains were strongest in the service sector: personal care, housing-related services, vehicle maintenance as well as heavy manufacturing. The gains in service sector wages are worrisome to the Federal Reserve, as that is where inflation has proven stickiest. Wages make up a larger share of costs in the service sector.

Separately, the unemployment rate rose to 4% in May, its highest level in more than two years. May broke the record streak below 4% for 27 months. The household survey, which determines the unemployment rate, differs from the establishment survey. Those who have multiple jobs show up as two paychecks in the establishment survey, while they are counted as one person employed in the household survey.

The ranks of the employed fell in the household survey, while the ranks of the unemployed rose. Those employed dropped to the lowest level since February, while the ranks of the unemployed were at the highest level since November 2021. Those under 24 years old, with a high school degree, drove the rise in unemployment although losses were broad-based.

Participation in the labor market declined to 62.5% in May from 62.7% in April. The drop was driven by men over 65 years old. Only teens, Hispanic men and those of Asian descent reported increases in their participation. Prime-age female participation hit a new record. Participation among Black women moved sideways; the number of white and Hispanic women fell, while participation for Asian women rose. 

Multiple job holders increased by 16,000 to the third highest on record. That means that many of the payrolls we are seeing include people with more than one job. A rise in multiple job holders has become a sign of improving economic conditions in the 2000s; it was a signal of weakness before that and still represents the need for multiple paychecks to make ends meet in an economy where inflation is still elevated.   

Part-time for non-economic reasons soared to the second highest on record, again something that is considered a sign of economic strength. However, working parents struggling with childcare responsibilities are included in what is known as “voluntary part-time.”  The better news is that part-time for economic reasons fell, as workers who were seeking full-time work were able to find jobs.

People out due to childcare problems fell after moving up earlier in the year. The worst months this year were in January and February, when more children were out sick. The number of those out on parental leave fell, but remained elevated relative to pre-pandemic norms due largely to the expansion of parental leave policies. 

The May employment report underscores a conundrum for the Fed. Wages accelerated in the sectors that have proven the stickiest in terms of inflation in the service sector, where labor costs are a larger determinant of prices. That means that the Fed must get prices elsewhere in the economy to drop to offset the gains coming from the service sector, which ups the risk of a hard instead of a soft landing. Debate within the Fed is expected to be heated over how much restraint the economy needs. The inflation report for May comes out during this next meeting and will determine whether the Fed decides to reduce rate cuts from two to one when officials release their forecasts with the June statement on policy.