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Zillow Market Pulse: June 5, 2020

mattspeakman

June 5, 2020

The job market pulled off a wild surprise, adding a net total of 2.5 million jobs in May, dropping the official unemployment rate to 13.3% — still a disturbingly high level. Sectors hardest-hit by the pandemic notched meaningful gains, largely thanks to government support.

  • 2.5 million jobs were added in May

    • About half of the employment gains were in leisure and hospitality, the sector hardest-hit by the coronavirus.
    • Despite the improvement, 13% of the workforce employed as recently as February remains out of work.
  • The unemployment rate fell to 13.3%

    • This measure almost certainly understates the true extent of joblessness in the economy.
    • A broader measure of unemployment – including those who have left the labor force and those who have a job but aren't working – is closer to 20%.
  • Government policy is likely driving these improvements

    • Criteria included in the Payroll Protection Program likely prompted hiring that doesn't necessarily reflect increased demand.
    •  There are wide racial disparities in employment levels and trends.

 So what?

Well, that was a surprise. In an unexpected beat, the labor market added 2.5 million jobs in May, even as most high-frequency indicators pointed toward another decline in the market. The official unemployment rate ticked down to 13.3%, labor force participation improved and some sectors that were hit hardest in the early days of the pandemic experienced notable job gains in May. All told, the report supports the idea that while the U.S. economy is in the midst of a severe recession, it appears to have avoided a full-fledged free fall. But while these headlines and market reaction suggest that this was a hugely successful day for the economy, the reality is that the labor market remains in a state of severe stress. The monthly changes get the most attention, but it's important to look at the levels in these releases as well. In total, 19.6 million jobs have been lost since February – 13% of the workforce as of February – and the unemployment rate of 13.3% remains well above the highest rate reached during the Great Recession. 

In retrospect, a modest improvement in the labor market from May to April should not have been this surprising. Most states began to re-open in May, and it makes sense that more people will work when it is legal to do so than when it isn't. Government policy has contributed to this improvement as well. The Paycheck Protection Program that made relief funding available to small businesses came with a stipulation that the majority of funding needs to be spent on payrolls and all of it needs to be spent within 8 weeks in order for the loan to become forgivable. As a result, there may have been an increase in jobs that isn't entirely representative of growing demand for hiring businesses' products or services. This isn't necessarily a bad thing – studies have shown that keeping people on the payroll will allow the labor market to recover more quickly and ensure that people are in the position to continue to pay their bills. But it does make the connection between job growth and market demand less reliable than in the past.

Even so, despite being at its highest level in at least 72 years, the official unemployment rate of 13.3% almost certainly understates the true extent of nationwide job losses. Adding workers who are "employed but not at work for other reasons," and those who have been forced to leave the labor force altogether because of health concerns or other constraints, yields an expanded unemployment rate of about 19.7%. And by that same token, only two-thirds of people still out of work as a result of the coronavirus are showing up as "unemployed" in today's report. What's more, a large portion of those who have been able to hang on to their jobs have seen their hours reduced. The number of workers who would like full-time work but can't get it because their employer doesn't have enough work for them has tripled since February. As noted, this is better than the alternative, but it also contributes to the fact that the report's headlines underestimate the true extent of the turmoil in the labor market. Lastly, the headlines also fail to shed light on the disparities in joblessness across demographics, particularly race. The increase in unemployment brought upon by the coronavirus outbreak has been disproportionately felt by black and Latinx workers. And while the unemployment rate improved for white workers (falling from 14.2% to 12.4%), it ticked up for black workers (to 16.8%, from 16.7%). Meanwhile, the unemployment rate for Latinx workers (17.6%) is the highest of any race or ethnicity.

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