Mortgage Minute

The labor sector dominated the headlines as the ADP and Bureau of Labor Statistics Jobs Reports for May were released. First up on Wednesday, the ADP Report showed devastating job losses in the private sector. However, they were significantly better than expectations, which we explain in more detail below.

Friday brought a huge surprise as the BLS reported 2.5 million job gains in May! That’s right, gains not losses. In addition, the Unemployment Rate decreased from 14.7% to 13.3% in May, which was much stronger than expectations of nearly 20%.

In housing news, CoreLogic's Home Price Index Appreciation report showed that home prices rose from March to April and when compared to April of last year. However, forecasts for May are for an annual decline in prices.

Lastly, the National Association of REALTORS® reported that 65% of people who attended an open house within the last year would do so now without hesitation. This speaks to buyers feeling a bit bolder and may support demand.

Huge Surprise in May Jobs Report

There were 2.5 million job gains in May, per the Bureau of Labor Statistics. Given that the market was expecting 7.7 million job losses, Friday's report was nearly a 10 million swing from what was anticipated.

The BLS explained, "These improvements in the labor market reflected a limited resumption of economic activity ... In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade." 

It's important to note that there are two reports within the Jobs Report – and there is a fundamental difference between them.

The Business Survey, where the headline job number comes from, is based predominantly on modeling. The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, meaning it may be more reflective of actual job numbers – and it came in even higher than the headline number, showing 3.84 million job gains.

The Unemployment Rate decreased from 14.7% to 13.3%, which was much stronger than expectations of nearly 20%. While there were 3.84 million job gains per the Household Survey, 1.58 million people entered the labor force, which is why we saw the unemployment rate decrease.

Lastly, average hourly earnings decreased from 7.9% to 6.7%, while average weekly earnings increased from 7.4% to 7.7%. Part of the reason for the weekly increase was an increase in hours worked of 0.5 hours.

ADP Employment Report Beats Expectations

The ADP Employment Report, which measures nonfarm private sector employment, showed that there were 2.76 million job losses in the month of May.

While this is still a staggering number of job losses, it was much better than the 8.75 million losses that were expected. Additionally, April’s figure was revised higher by 679K, lowering the job loss total from 20.236 million to 19.6 million.

While we are in unprecedented times and the margin for error is likely extremely high, it's important to consider how ADP beat expectations by so much.

The answer likely has to do with the number of individuals who returned to work in May. By looking at Continuing Jobless Claims that are reported each Thursday, we know that 4 million people returned to work in just one week. And because continuing claims are backward looking by two weeks, we don’t know exactly how many people returned to work in the entire month of May yet. It’s possible that there were 7 to 8 million people who returned to their jobs, which would explain why there were only 2.76 million job losses instead of the expected 8.75 million.

Weekly Initial Jobless Claims Fall Below 2 Million

Another 1.877 million individuals filed for unemployment benefits for the first time during the week ending May 30. This amount met estimates and was a decrease from first-time filings in the previous week.

Interestingly, the number of continuing claims,

increased by 650K to 21.5 million. This is quite a change from the previous report, which showed a 4 million decrease in continuing claims as people returned to work. One possible reason is that many people are making more money on unemployment than they were while working. We have seen estimates that 40% of workers are making more, some almost double, on unemployment benefits, impacting the incentive to return to work.

Home Prices Continued to Rise in April

The latest CoreLogic Home Price Index Appreciation report showed that home prices rose 1.4% from March to April. Washington (5.7%), Las Vegas (5.4%), and San Diego (5.3%) led the gains. Home prices were also up 5.4% when compared to April of last year, which is up from the 4.5% annual increase seen in the previous report.

CoreLogic forecasts that home prices will rise 0.3% from April to May, but they do expect prices to fall 1.3% in the year going forward. If this proves accurate, it would be the first decline in their data in 9 years.

What to Look for This Week

The latest weekly Initial Jobless Claims remains critical to watch when it releases as usual on Thursday. Also important are 10-year note and 30-year bond auctions and the Fed's regularly scheduled two-day meeting that will culminate with their statement on Wednesday. Inflation will also be in the news, with May's Consumer Price Index coming Wednesday and the wholesale-measuring Producer Price Index on Thursday.