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Economic & Housing Weekly Note

A Solid May Employment Gain Rebounds from April’s Weak Reading

June 4, 2021

Key Takeaways:

  • Nonfarm payroll employment expanded by 559,000 in May, according to the Bureau of Labor Statistics. Job gains the prior two months were revised up 27,000 on net. Leisure and hospitality employment gained 292,000, over half of the total gain. Manufacturing and residential construction employment (including specialty trade contractors) rose 23,000 and 1,900, respectively, but both industries saw significant downward revisions to prior months. The unemployment rate and the labor force participation rate fell to 5.8 percent and 61.6 percent, respectively. The average workweek was flat at 34.9 hours for the third consecutive month, though average hourly earnings rose 0.5 percent from April.
  • The ISM Manufacturing Index rose 0.5 points to 61.2 in May. Any reading above 50 indicates expansion. New orders increased, while the production and employment indices each fell, with the employment index falling to 50.9, the lowest level since November. The ISM Service Index rose 1.3 points to 64 in May, a record high since the survey began in 1997. Similar to the Manufacturing Index, new orders and business activity components increased over the month while the employment index declined.
  • Light vehicle sales fell 7.8 percent in May to a seasonally adjusted annualize rate (SAAR) of 17.09 million, the largest monthly decline since April 2020, according to Autodata.
  • Private residential construction spending increased 1.0 percent in April and was revised upward in March, according to the Census Bureau. Both new single-family and multifamily spending increased, rising 1.3 percent and 1.9 percent, respectively. Spending on improvements also rose, edging up 0.3 percent.  
Forecast Impact:

May data continue to suggest the economy is clawing its way toward a full recovery, though evidence of inflationary pressures is growing. The rebound from April’s weak employment report and upward revisions to prior months confirmed that April was somewhat of an anomaly. Leisure and hospitality employment drove the headline number and we expect that trend to continue with robust job gains in the coming months. Still, the pace of job creation appears slower than what recent output growth would suggest, implying firms have been generating productivity gains. Whether this is sustainable is a key risk, as slower job growth combined with swift gains in average hourly earnings is consistent with business surveys reporting difficulty finding workers. We believe this could lead to stronger than expected inflation and slower growth later this year.

Manufacturing and service sector employment both rose in May, consistent with increased activity in those industries. Manufacturing activity seems to be withstanding increased commodity prices, while service sector activity reached an all-time high despite significant supply chain constraints. Business fixed investment surpassed pre-COVID levels in Q1, and we continue to expect a strong Q2, but supply chain constraints and sluggish nonresidential construction spending remain key risks to our forecast for the second half of 2021.

Auto sales, an early indicator of consumer spending, fell sharply in May as the latest stimulus checks’ influence waned and supply constraints in the auto industry continued. Although we expect resilience in consumer spending as the economy reopens, decreased direct federal support and lower unemployment benefits starting this summer will drag on disposable incomes, likely limiting large purchases like vehicle sales in the near-term and leading to decelerating PCE growth.

Finally, strong residential construction spending in April was in line with our Q2 forecast. We suspect growth in residential investment will continue in the near term, though rising building costs, limited construction labor and materials, and declining sales present major risks.   

Rebecca Meeker
Economic and Strategic Research Group
June 4, 2021

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.