KEY DATA:  Payrolls: +2.5 million; Private: +3.1 million; Restaurants: +1.37 million/ Unemployment Rate: 13.3% (down 1.4 percentage points); Unemployed: -2.1 million

IN A NUTSHELL:  “The road to recovery has begun.”

WHAT IT MEANS:  Boy, did we get it wrong.  It was expected that May would be the last month of really ugly employment numbers, but the moves to reopen came faster and stronger than anticipated.  Instead of another large decline in payrolls, the economy added 2.5 million jobs.  The restaurant sector, which was largely shuttered in March and April, started to reopen in May and added the most numbers of workers.  With take-out turning into eat-in this month, those gains should accelerate. Keep in mind, in February, there were 12.3 million workers in this sector but in May, the total was still only 7.6 million, meaning a lot of workers still need to be rehired.  Big increases were also seen in construction, retailing, manufacturing, health care and administrative services.  As far as weak links go, the major one was state and local governments, which cut over 570,000 workers.  The education sector was decimated and that raises serious concerns for schools in September.  As for the private sector, airlines continued to reduce employment significantly.  One final note: Despite the large addition to payrolls, there were still 19.6 fewer jobs in May than in February.  That is the hole we have to dig out of.

On the unemployment front, the news was way better than expected as well.  Despite the large number filing for unemployment insurance in May, the callbacks overwhelmed the layoffs and the unemployment rate dropped.  Keep in mind, the rate is still nearly ten percentage points above where it was in February and well above the 10% peak during the Great Recession, so we have a long way to do to get back to where we were.  The number of people employed rose by nearly four million, half of those coming from the unemployed rolls and half from people who had dropped out of the labor force.  Though the so-called “real” unemployment rate remained above twenty percent, about a third of that rate came from workers employed part-time for economic reasons. That could be due to the partial re-opening of restaurants.  The move back toward at least some eat-in arrangements should cut into that number sharply in the months to come. 

IMPLICATIONS:  The reopening of the economy is starting and the first clear sign is in employment.  Given the massive and widespread shut downs, it was assumed we would see some really big increases, it’s just that they started happening a month earlier than expected.  Don’t be surprised if the June report is even better.  Thus, those who forecast a third quarter economic decline of up to forty percent will likely be revising their numbers dramatically.  I was near the bottom of the panels with -22%, but that may be too large.  However, we knew that the first few months of recovery would be really robust.  That it came in May and June instead of later is a timing issue.  Instead of an historic, massive decline in the second quarter, it will be only huge.  That means the third quarter growth rate will be large not massive. 

I have argued over the past few months that what matters is not the third quarter growth rate but what happens once we get past the initial phase of re-openings and government supported hiring and income supports.  That is, once the economy has to stand on its own.  The continued high levels of unemployment claims and the likelihood of continued cut backs in government payrolls argues that we have to be cautious about thinking we can get back to the pre-virus shutdown economy quickly.  The extra $600 per week unemployment add-on and the business subsidies are slated to end this summer and we saw in the income report that government transfer payments have supported income growth.  This report makes it harder to argue the government should go further into debt if the economy is already recovering.  Once government support is withdrawn, though, one critical driver of the recovery will disappear and that could slow growth.  Let’s be realistic, there will be a lot of firms that have been permanently damaged or who will be operating at lower levels than they were pre-virus for an extended period. You don’t shut down an economy for two months and think there will be no long-term impacts.  Let’s enjoy the fact that we are starting to recover and the short-term looks good, but the long-term path remains uncertain.