U.S. Unemployment Rate Spikes Higher in May

The decline in payroll employment was the fifth in succession since the beginning of the year (average monthly decline: 65,000). The usual culprits (manufacturing, construction, and retail) lost jobs, outweighing gains in healthcare, education, and government. The manufacturing loss (26,000) was less severe than in recent months, and concentrated in construction-related sectors (wood products down 8,000, nonmetallic minerals down 5,000). Computers and electronics also saw losses (7,500). Construction fell 34,000 (25,000 of which was in the residential sector).

The declines in manufacturing and construction were not as steep as in April, but the overall report turned out worse because private services lost jobs (down 9,000), after the surprising 60,000 gain in April. The retail sector continued to shed jobs (down 27,000) while wholesale trade, transportation, and warehousing and credit intermediation also softened. April's strength in professional and business services was not repeated. High-end professional payrolls saw declines, as professional and technical services lost 10,000 jobs (largely in accounting and book-keeping), after a 22,000 increase last month. Meanwhile, the decline in temporary-help jobs (down 30,000) re-accelerated in May, after easing in April.

There were still pockets of strength in private services, notably in healthcare (up 34,000), education (up 12,000), and food services and drinking places (up 11,000). It is surprising that the squeeze on real incomes from soaring gasoline and food prices has not yet done more damage to eating out. Government services employment rose 17,000, mostly in local education.

Overall hours worked declined by 0.1%, while the workweek was stable after it shortened in April. Hours worked appear headed for a second-quarter decline very similar to the 1.1% drop in the first quarter.

The payroll report showed continuing weakening in the labor market, but not a quantum shift from the previous trend. But the unemployment rate recorded a much sharper deterioration. The last time that the jobless rate moved up by 0.5 percentage point in one month was in February 1986. The measured number of unemployed surged by 861,000, as employment on the household survey basis fell by 285,000, while the labor force surged 577,000 higher.

The middle months of the year—May through July—see a substantial flow of young workers into the labor force as the school year wraps up. The May household report suggests that the initial influx of young workers found it very difficult to find work, as business hiring has become more cautious. The unemployment rate for teens rose from 15.4% to 18.7%, and the rate for 20–24 year-olds rose from 8.9% to 10.4%. The rate for the core of the working-age population (25–54 year-olds) was also up, but less dramatically, from 4.2% to 4.4%.

It is dangerous to read too much into one month's data, since seasonal adjustments can be thrown off by changes in the timing of the survey week or in school schedules. Some of this month's move in the unemployment rate surely reflects statistical noise. The April reading (5.0%) was probably an under-estimate of the underlying trend, while the May rate (5.5%) is probably an over-estimate. We expect to see the rate ease back by a 10th of a point or two in the next couple of months—but make no mistake, the trend is up. We see joblessness rising to an average 5.9% in 2009.

The rise in unemployment throws some cold water on the idea that the Federal Reserve will soon raise interest rates to prop up the dollar and rein in inflation. The Fed is in a difficult spot, with first-half growth not far above zero, but inflation climbing. We believe that the economy is too fragile for a rate hike before 2009.