The Big Idea

The noise behind the rise in May unemployment

| June 14, 2024

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

There is tremendous seasonal volatility in the labor market over the course of the year. Perhaps the greatest churn occurs at the end of the school year when graduates begin their careers, students take summer jobs, and many education workers drop off of job rolls. The May household survey figures released a week ago looked especially soft, in sharp contrast to the robust gain in payroll employment. But it appears the numbers may have been distorted by odd movements among college-age adults, casting doubt on the validity of the results. The rise to 4.0% in the unemployment rate in May may not be an accurate reflection of the current situation in the labor market.

May household survey results

For a while, the two major surveys of the labor market that make up the monthly Employment Reports have been sending puzzlingly divergent signals.  Payroll employment has been robust so far this year, with job gains averaging 248,000, essentially even with last year’s vigorous performance.  In contrast, the household survey gauge of employment has been erratic from month to month, as usual, but in general has been weak, posting a cumulative outright decline since September.

The May results were especially difficult to square, as the payroll employment gauge surged ahead by 272,000, an acceleration of over 100,000 from April’s rise, while the household survey measure of employment sank by 408,000, helping to drive the unemployment rate up to 4.0% for the first time since January 2022.

There has been a robust ongoing debate among economists regarding how to explain the diverging fortunes of these two alternative metrics.  Various hypotheses have pointed to several different forces, including immigration and faulty birth and death adjustments.  In general, the leaning among financial market participants seems to be to look for explanations that suggest that the labor market is not so strong, a natural inclination since most investors are rooting for the Fed to cut rates sooner rather than later.

Household survey noise

I would like to introduce an alternative narrative to explain the diverging signals from the two gauges.  The household survey tends to be far less reliable on a month-to-month basis, in large part because it is a much smaller survey, encompassing only about 60,000 households a month.  Historically, it has generally exhibited far more high-frequency noise than the payroll count, which comes from a separate (and far more comprehensive) survey of employers.

To offer some historical perspective, we can look at the 2018 and 2019 data, a relatively steady period prior to the pandemic.  Using the February-to-December averages as a proxy for the year’s performance—the January month-to-month changes are distorted by the annual population control revisions—the household employment gauge gains averaged 217,000 in 2018 and 214,000 in 2019, a very reasonable set of results and, on the surface, an extremely steady trend.  However, in 2018, the individual monthly readings ranged from a drop of 642,000 to a rise of 772,000, and not a single monthly reading came within plus or minus 100,000 of the average. If you did not find that last point striking, read it again!  For 2019, the results were a bit less wild, but the numbers still ranged between a drop of 162,000 and a gain of 510,000.

So, perhaps it is not especially unique that of the household survey employment readings over the past nine months, six of them have been gains of 50,000 or below and the other three were up by at least 498,000.  In short, not a single one of them has been anywhere near the presumed trend.

College-age anomalies in May

As you might imagine, if we take a data series that is already erratic in the aggregate and then break it down into smaller components, the pieces are going to exhibit even more volatility.  That was certainly an issue in May.

The Bureau of Labor Statistics breaks down the monthly household survey data in a variety of ways, including by gender, ethnicity and age.  There was a particular anomaly in the detailed data in May that perhaps sheds some light on the overall results.

For the 20-to-24-year-old age group, the labor market suddenly swooned in May.  The level of household employment for this age group sank by 474,000 last month, which works out to a 3.3% fall.  To put that into perspective, a 3.3% decline for the overall household survey employment figure would amount to a drop of over 5 million!

The labor force for this age group also decreased sharply, by 319,000.  Even so, since the employment tally was down by much more, unemployment for this cohort soared by over 150,000.  The unemployment rate for 20-to-24 year olds surged by 1.2 percentage points in May to 7.9%.  To be sure, moves up and down of three or four tenths for this measure are quite common, but a swing of over a full percentage point is unusual though not unheard of.

My first thought was that perhaps seasonal adjustments accounted for these swings. One could imagine that the seasonals assume a huge influx of college graduates and students into the job market as the school year ends. Perhaps the 2024 version of that was just smaller than usual, yielding negative seasonally adjusted readings. That dynamic does happen, but it typically comes in June, not May. The not seasonally adjusted household employment figure for 20-to-24 year olds was 462,000, not much different from the seasonally adjusted figure.

Without an easy logical explanation, I am drawn back once again to the explanation that is not especially intellectually appealing but is most likely: statistical noise.  There are no guarantees that the May job losses for this cohort will be largely reversed in June, but I would certainly put the majority of my chips on that possibility.

Implications for the aggregate numbers

My next question was what the aggregate figures would have looked like if we take the 20-to-24 year old cohort numbers out of the calculation.  The answer is that the household survey measure of employment would have posted an increase of 66,000, and the labor force would have risen by 69,000.  The unemployment rate excluding the 20-24 age group was 3.5787% in May compared to 3.5783% in April, that is, it was higher by less than half a basis point, not a full tenth of a percentage point.

This analysis only adds to my case that the household survey results on a month-to-month basis are far less reliable than the payroll figures.  When faced with having to choose which one is offering a more accurate read on the labor market, I will pick the payroll data almost every time.  I cannot promise that this anomaly among the college-age cohort in the household survey will reverse in June or even that the payroll and household survey gauges will come into alignment any time soon, but I am skeptical that the soft household survey results in May should be taken at face value.  In particular, I do not see the backup to 4.0% in the unemployment rate in May as an accurate reflection of the current underlying situation in the labor market.

Stephen Stanley
stephen.stanley@santander.us
1 (203) 428-2556

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