Strategy Insight: Well, That Was Quick

June 09, 2020
Chief Investment Strategist Scott Clemons explores the path to economic recovery following the U.S. labor market’s sharp rebound in May.

Against all expectations, the U.S. labor market rebounded sharply in May, adding 2.5 million jobs and bringing the headline unemployment rate down to 13.3%, from 14.7% in April. Consensus expectations leading up to last Friday’s Bureau of Labor Statistics (BLS) release called for a loss of an additional 7.5 million jobs, so analysts were off by a staggering 10 million people. That enormous gap between expectations and reality speaks to the unprecedented volatility and unpredictability of the economic cost of the coronavirus pandemic.

This surprisingly good report is also evidence of the amount of noise in the system. To compile the monthly data, BLS analysts usually conduct interviews via telephone and in person. COVID-19 precautions precluded real interviews in April and May, leading to a response rate 15% below pre-crisis levels. Furthermore, the BLS acknowledged that the peculiar nature of furloughs and temporary absences from work has muddled the definition of unemployment. “As was the case in March and April,” the BLS reports, “household survey interviewers were instructed to classify employed persons absent from work due to coronavirus-related business closures as unemployed on temporary layoff. However, it is apparent that not all such workers were so classified.”

The BLS estimates that adjusting for this misclassification, the unemployment rate for May would have been 3 percentage points higher (that is, closer to 16%). The same categorization error also skewed the April report, understating the unemployment rate by close to 5 percentage points. The bad news, therefore, is that the May unemployment rate is likely understated, and labor market conditions aren’t as good as they appear. The good news is that April data was even more understated, and the rebound in May was therefore even more impressive than headlines would indicate. This classification challenge is not a new development: It occurs particularly during periods of government shutdowns, when public employees are furloughed temporarily, and therefore technically unemployed until the government reopens, although they may not think of themselves as such.

Regardless of noise and data collection challenges, the May employment report demonstrated that, as state and regional economies cautiously reopened last month, there were jobs for workers to go back to. The biggest gains came precisely in those sectors that were most impacted by shutdowns in the first place. Leisure and hospitality led the way as restaurants began to open their doors, restoring over 1.2 million jobs during the month. Construction, education and health services, retail trade, manufacturing and professional services also experienced significant gains. The only sector to suffer a further sharp decline in May was government, driven largely by the continued closure of public schools and the furloughing of associated workers.

Chart illustrating job gains and losses for various sectors in May, with leisure and hospitality with the biggest change of over 1.2 million job gains.


The gain of 2.5 million jobs in May is a record in the history of labor statistics but follows a record loss of 20.7 million jobs in April. We are encouraged by the rebound and impressed by the resiliency of the U.S. economy in the face of such stark business challenges. Nevertheless, there is a long way to go to restore the labor market to pre-crisis employment levels.

Employment cycles usually look more like waves than cliffs. In the last economic cycle, employment peaked in January 2008 and rolled over into an accelerating decline throughout the global financial crisis, bottoming 25 months later in February 2010 with a cumulative loss of 8.7 million jobs. It took 51 months for employment to return to pre-crisis levels in May 2014. This time around, employment peaked in February 2020 at 152.5 million jobs, before dropping sharply in March and April to 130.4 million jobs, almost exactly the trough in early 2010. In other words, the U.S. economy gave up a decade of job gains in two months. The recovery in May represents a recovery of about 11% of those lost jobs. Whereas we welcome what we hope is the first leg of a recovery in labor markets, we acknowledge that there is much further to go.

Chart showing non-farm employment from 2005 to May 2020, when it had a rebound of 2.5 million jobs.


Despite the vagaries of the data, the May employment report is encouraging. Due in some part to the CARES Act and the Payroll Protection Program, it seems that more jobs survived the national lockdown than some analysts feared. The path to full recovery will still be long and slow, but it appears to have begun sooner than we anticipated. As more and more states, regions, cities and establishments reopen for business, we should see the labor market continue to improve in months to come.

Opinions, forecasts, and discussions about investment strategies represent the author’s views as of the date of this commentary and are subject to change without notice. References to specific securities, asset classes, and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations. Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally.  This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented.  This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020.  All rights reserved. PB-03734-2020-06-08

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