Employers posted a blockbuster 339,000 jobs in May in the latest sign that a booming labor market continues to prevent the country from slipping into a recession, but the economy also signaled new warning signs with an increase in the unemployment rate.
The unemployment rate rose in May to 3.7 percent from 3.4 percent, one of the fastest increases since early in the pandemic, according to the Bureau of Labor Statistics data released Friday. Some 440,000 more workers reported that they are unemployed — and most of those were due to temporary jobs ending or layoffs, according to the data. Some of that increase could be driven by layoffs in the tech sector that have hit 200,000 workers this year, according to the tech layoff tracker Layoffs.fyi.
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The weakness was fueled by a sharp rise in Black unemployment, which had reached a record low in April, and increased by nearly an entire percentage point to 5.6 percent in May.
“Today’s report definitely showed mixed signals,” said Daniel Zhao, lead economist at the jobs site Glassdoor. “But the point is that the labor market is hot but not too hot, and the labor market is continuing to slow.”
The White House trumpeted Friday’s job report in a statement on Friday, hours after Congress passed a debt ceiling deal that trims federal spending and prevents the federal government from being unable to pay its bills.
“Today is a good day for the American economy and American workers,” President Biden said in the statement. “And due to the historic action taken by Congress this week, my economic plan will continue to deliver good jobs for the American people in communities throughout the country.”
Overall, the May jobs report was good news, reflecting the 29th straight month of strong job growth that has come to define the pandemic recovery economy. Economists had predicted a much smaller number of jobs created in May, around 180,000.
For months, employers have churned out jobs at a pace that has baffled economists. The labor market has propelled the economy through a barrage of forces that would normally weigh on jobs creation — steep interest rate hikes, slowing economic growth, and bank failures.
Despite strong payroll gains, the May jobs data could result in Federal Reserve officials sticking to the plan of pausing interest rate hikes at their upcoming June meeting, as the jump in unemployment complicates the picture of an otherwise healthy labor market.
Hardy job gains in May were spread across a variety of industries including government, health care, professional and business services, and social assistance, as consumers have continued to spend heavily on services coming out of pandemic lockdowns.
On top of that, construction — an industry more sensitive to interest rate hikes — defied expectations and continued to notch big gains, adding 25,000 jobs in May.
At the same time, job gains in the leisure and hospitality industry, a driver of ongoing labor market tightness, have begun to show signs of softening. And job growth in manufacturing and information ticked down slightly.
Economists noted the spike in unemployment shows that laid off workers are struggling more to find jobs. To make matters worse, data shows that the country’s marginalized workers are driving the increase in unemployment. Black workers made nearly half of May’s spike in unemployed workers, though economists caution that month-to-month data on race can be volatile.
Meanwhile, the unemployment rate also shot up in May for disabled workers and those without high school and college diplomas.
“When firms move away from more vulnerable populations, it’s probably a sign that they’re preparing for economic weakness,” said Drew Matus, chief market strategist for MetLife Investment Management.
Average hourly wage growth slowed, rising 0.3 percent between April and May, up to $33.44 an hour. The Federal Reserve has closely monitored wage growth as a gauge of whether the economy has cooled enough to control inflation. Wages are rising faster than they have in years for earners on the lowest end of the wage scale, but overall wage growth is not keeping up with inflation, adding stress to Americans’ pocketbooks.
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“We are not currently in a recession, but we are likely to see one towards the end of this calendar year,” said Rand Ghayad, head of economics and global labor markets at LinkedIn. “The resilience and robustness of the U.S. labor market means the economy can absorb more Fed rate hikes than we previously thought.”
Adults in their prime working age of between 25 and 54 are back in the workforce at the highest rate since 2007. And as of May, adult women in their prime working age were employed at rates not seen in two decades.
At the same time, the overall labor force participation rate, a metric that policymakers have charted closely coming out of the pandemic, changed little in May, at 62.6 percent. That is still 0.7 percent lower than its pre-pandemic level. Due to health concerns, aging and child-care needs, some workers have been slow to reenter the workforce, exacerbating employers’ need for labor.
Many economists are predicting a recession later this year, especially if the Federal Reserve keeps hiking interest rates to curb inflation.
“We’re really likely to experience some kind of contraction in at least the second half of 2023, but job growth has pushed back [our expectations],” said Matt Colyar, an economist at Moody’s Analytics.
There are other signs that the labor market remains healthy. New applications for unemployment benefits, often an early predictor of recessions, remain low. And job openings unexpectedly soared by half a million in April, according to new data from the Bureau of Labor Statistics released Wednesday.
Beyond the labor market, there are other reasons for optimism. Consumer spending, which drives the U.S. economy, increased in April after two months of slowdown, according to the Commerce Department. The financial markets have rebounded in recent months.
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Elise Gould, a labor economist at the Economic Policy Institute, a left-leaning think tank, said that the coronavirus stimulus packages enacted by the government have helped create consumer demand that has carried the labor market through a storm of economic uncertainty.
Still, there are signs of trouble. The U.S. economy faltered in the first months of 2023, growing at a lackluster annual rate of 1.1 percent. Manufacturing output has weakened, and credit lending — which gives employers more ability to expand and hire — has tightened up.
There has also been some evidence of cooling in the labor market. Unemployment insurance claims, though historically low as of late May, have risen by more than 25 percent since their low point in 2022.
Job openings have begun to fall in the service sector, including in leisure, hospitality and government, areas that were booming earlier this year. The rate of workers who quit their jobs fell in April, almost returning to its pre-pandemic levels, suggesting workers are less confident in their ability to switch jobs than they were last year.
Layoffs, although higher than a year ago, fell in April, even as mass job cuts swept through tech companies, such as Meta and Lyft, making headlines.
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“The story is that the economy’s been weak and it appears it will get weaker,” said Joseph LaVorgna, chief economist at SMBC Nikko Securities America. “But there isn’t any obvious sign that the labor market is about ready to go off a cliff.”
Some industries are faring worse than others. For months, the transportation and warehousing industry has weathered slow job growth, but recovered some of its momentum in May, adding 24,000 jobs.
Coming out of the pandemic, consumers shifted their spending away from goods, such as online shopping, and infused their earnings into services, such as travel and dining out. Meanwhile, a supply chain crisis during the pandemic that created a backlog of demand has largely been resolved.
Amazon has canceled or delayed dozens of new facilities and has closed existing ones, and laid off thousands of corporate workers since last year. (Amazon founder Jeff Bezos owns The Washington Post.) Walmart, meanwhile, laid off more than 2,000 warehouse workers in April. Other logistics companies — large and small — have slowed hiring, and shrank their workforce by not filling openings as workers quit.
“Consumer demand for products has gone down,” said Patrick Penfield, a professor of supply chain practice at Syracuse University. “We’re seeing warehouses and trucking companies laying off people. Their goal is to try to survive a recession.”
Despite relatively concentrated pockets of cooling, American consumers and workers are increasingly pessimistic about the economy. Consumer sentiment sank to a six-month low last month, according to a University of Michigan consumer survey. Job seekers have become more concerned about labor market conditions and their personal finances in the first quarter of 2023 than they were last year, according to ZipRecruiter’s job seeker confidence index.