The following analysis is based off of Morning Consult’s high frequency economic indicator data. Read more from our June 2021 U.S. Economic Outlook report.
The U.S. employment recovery ground to a standstill in May. Elevated pay and income losses, high unemployment and low labor force participation all signaled that the road to recovery will be bumpier than many imagined a few months ago. While the U.S. economy will likely add jobs in the coming months, the timing of the employment recovery matters. Additional delays in the timing of the employment recovery pose serious risks to the economic outlook over the next four months, particularly if households’ finances weaken before workers have additional wage income to pay their bills.
Fortunately, households’ finances remained strong enough through the end of April to withstand the slowdown in job creation, but the clock is ticking. Federal unemployment benefits are winding down, missed rent and mortgage payments are coming due, and prices of basic goods like gasoline and groceries are rising. Without additional income from jobs, millions of Americans will begin cutting back on spending and eating into their savings in June, leaving the consumer-driven economy more vulnerable in the months ahead.
Pay and income losses remained elevated across the income spectrum at the end of May, indicating persistent weaknesses in the demand for labor. For the week ending May 22, 12.8 percent of the U.S. adult population experienced a loss of pay or income at some point during the prior week, essentially unchanged from the last full week of April.
The rate of pay and income losses has to fall further for workers who dropped out of the labor force to start looking for work. It is difficult for discouraged workers who stopped looking for work to justify spending the time to apply for jobs when they see their spouses, neighbors and friends continuing to lose pay or income.
Unemployment and labor force participation
The unemployment rate in May remained essentially unchanged from April, stalling at 13.4 percent for the week ending May 22. However, low labor force participation rates in May mask additional weaknesses in the employment recovery not captured by the unemployment rate. At 54.5 percent, the labor force participation rate currently stands 0.7 percentage points below its value on Aug. 5, 2020. This decrease in labor force participation reclassifies previously unemployed adults as being out of the labor force, leading to a lower unemployment rate.
While many workers who drop out of the labor force are likely to re-enter once their prospects of finding a job improve, some of them will be permanently out of the labor force. From Aug. 5, 2020, to May 22, 2021, most workers who dropped out of the labor force indicated that they had retired. Growth in retirees suggests the recent fall in labor force participation will persist well after the economy reopens since retirees are less likely to return to the labor force than those that left for other temporary reasons such as school.
The standstill in the employment recovery occurs against the backdrop of additional demands on workers’ wallets. Federal unemployment benefits are being phased out in some states as early as June 12, and the benefits expire across the country on Sept. 6. Homeowners and renters who have been in forbearance for the past 12 months are also on the hook to start repaying rent and mortgage payments they have not been making. Finally, rising gasoline prices are leaving households with less to spend on discretionary purchases.
Read more from our June report on the U.S. economic outlook.