A Mysterious Employment Report: Reconciling Contradictory Messages

The May Employment Report from the Bureau of Labor Statistics (BLS) sent a contradictory message to markets, leading analysts to puzzle about what is going on. The Establishment Survey, which surveys businesses, nonprofits and government agencies about their payrolls, gave very upbeat data for May. However, the Household Survey, which surveys households about the employment status of their members, provided grim estimates for employment, reporting the highest unemployment rate in more than two years. The contradiction is no small issue. Financial markets pay close attention to the Employment Report, so data surprises tend to move prices. And the Federal Reserve takes the report very seriously in its deliberations about monetary policy.

So what’s going on? I think the Household Survey reading was misleading and gave too pessimistic a message. In the next report, out Friday 5 July, the signal will likely reverse and resolve the contradiction.

The culprit: workers aged 20-24

Household employment plunged 408,000 in May, the third-largest drop in more than three years. Moreover, the labor force fell a sharp 250,000, largely due to a drop in the labor force participation rate. Because employment fell more than the labor force, the unemployment rate jumped from 3.9% in April to 4.0% in May.

Grim as the results from the Household Survey may seem, I believe the reality is not as bad as it appears. The overall drop in employment was more than accounted for by a huge 474,000 decline in employment among those aged 20 to 24 years. And the overall drop in the labor force was more than accounted for by a huge 319,000 drop in the labor force in the same age group. The increase in the number of unemployed was essentially contained in this age group.

Summer employment and seasonal distortions

In the raw data, there are large seasonal fluctuations in employment and labor force. The BLS tries to account for these fluctuations with its seasonal adjustment process. The figures reported in the news are for the seasonally adjusted data, not the raw data.

But the seasonal adjustment process is imperfect, and more so at the start and end of the summer season. For those aged 20 to 24 years, many are in school, and the start and end of the school year tends to drive fluctuations in the labor force and employment as these young people seek and often find summer jobs. Typically, the demand for temporary summer jobs spikes as school is letting out. Think of workers at swimming pools, ice cream stands, restaurants, resorts and parks.

In most cases, the raw data for May shows an increase in the labor force and employment for those aged 20 to 24 years. For some reason, the labor force and employment for that age group fell in May 2024. In view of the tight labor market and scarcity of workers, these facts seem strange. I have no explanation for them, and I suspect the issue is flawed seasonal adjustment. The issue may be the timing of the end of the school year relative to the BLS survey week. Or it could just be sampling error.

Look for mean reversion

I expect mean reversion in the next Employment Report as the labor force and employment rebounds for those aged 20 to 24 years, which should boost overall employment. If we don't get a reversal, it would suggest that some economic fundamentals may be at work.  

All employment figures sourced from the Bureau of Labor Statistics' May Employment Report, published 7 June 2024.

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