The jobs report's top line hides sectoral weakness.
The number of payroll jobs rose 139,000 in May, on par with its average monthly gain over the past year. The unemployment rate held steady at 4.2%.
The total job gains were above the consensus forecast. (They were much higher than the ADP estimate earlier this week, but that is always a very poor predictor of actual job change.) And with unemployment holding steady at 4.2%, there are no clear signs of a softening overall labor market.
But if you look at industry detail, some worrisome signs are evident. In particular, virtually all of the job gains were in two sectors: health care (the perennial grower) and leisure & hospitality (primarily food services). Professional & Business Services shed jobs, all of them in temporary help. Other industry-level changes in May were minimal.
Goods production as a whole shed a relatively small 5,000 jobs. These were centered in durable goods manufacturing. Construction was flat. So here is where we begin to worry. While it is impossible to know the extent to which trade policy is a cause of the growth stall, manufacturing was already weak—certainly, the massive tariff increases will weigh on manufacturing and construction going forward. This will also cause problems for retail sales, which fell in May after moderate gains earlier in the year.
One perhaps surprising piece of information in this report is the relatively small declines we have seen in federal government employment. Since January, federal payrolls are down “only” 59,000 positions. In part, this reflects the substantial number of federal employees (76,000 according to The N.Y Times) who took buyout offers. Most of these folks are being paid through September, so we will probably see a sharp drop at that time. There are at least another roughly 150,000 planned job cuts, but it is unclear if or when they will occur, given legal challenges.
Key Takeaways
- The US economy added fewer jobs in May compared with April, but economists say the labor market still looks healthy.
- The largest gains came from the healthcare and leisure and hospitality sectors.
- The Trump administration’s federal workforce layoffs had only a minor impact on the data.
- With the labor market holding up, analysts expect the Federal Reserve to hold rates steady at its June meeting.
Investors have been bracing for the impact of tariffs and other policy decisions in Washington on the US economy, but jobs data released Friday showed only a modest (for now) slowdown in hiring.
The economy added 139,000 jobs last month, according to data released Friday by the Bureau of Labor Statistics. That was above economists’ forecast of 125,000 jobs but below a downward-revised increase of 147,000 jobs in April. The unemployment rate held steady at 4.2%. Federal workforce cuts weighed on growth, but gains in the healthcare and leisure and hospitality sectors helped offset that drag.
“While federal layoffs provide a minor drag, overall labor markets are holding steady,” says Preston Caldwell, senior US economist at Morningstar. Nonfarm employment is now growing at 1.1% annually. That’s “slightly below the 1.5% average in the pre-pandemic period of 2017-19, but still quite healthy,” Caldwell says.
With the labor market holding up, analysts expect the Federal Reserve to continue holding interest rates steady through July or September as it continues to combat inflationary pressures.
Monthly Payroll Change
May Jobs Report Key Stats
- Total nonfarm payrolls rose by 139,000 after rising by 147,000 in April.
- The unemployment rate held steady at 4.2% in May from April.
- In May, average hourly wages rose by 14 cents, or 0.4%, to $36.24.
- The average workweek for all employees on private nonfarm payrolls remained unchanged at 34.3 hours in May. For manufacturing employees, the average workweek rose to 40.1 hours in May, up from 40.0 in April, while overtime remained unchanged at 2.8 hours.
Unemployment Rate
Federal Job Cuts Weigh on Growth
The Trump administration’s push earlier this year to reduce the size of the federal workforce is beginning to show up in labor market data. Overall, federal employment has declined by 2% since January, or 59,000 jobs. Caldwell emphasizes that this accounts for just 0.04% of total employment, but adds that losses could mount in the coming months, since federal employees who took buyouts are currently still counted in employment numbers. “We’ll likely see further federal job losses in the coming months as the buyout employees roll off severance,” he says.
Transportation Jobs Decline Amid Tariff Worries
On the other side of the equation are gains in healthcare and leisure. Those sectors account for 93% of job growth in the United States over the past three months, according to Caldwell.
Meanwhile, retail employment has remained flat, while employment in transportation has fallen at a 1.4% annualized pace over the past three months. Caldwell says that decline “suggests goods-supplying industries may be preparing for the negative impact of demand tariffs.”
Selected Payroll Categories
When Will the Fed Cut Rates?
Caldwell says May’s jobs data is unlikely to change the trajectory of interest rate cuts from the Federal Reserve, since the labor market is holding steady and jobs data tends to lag more forward-looking indicators of economic health.
The central bank has held interest rates steady at their range of 4.25%-4.50% since last December amid sticky inflation and uncertainty about how Trump administration policies like tariffs could affect the economic picture. With no signs of major stress in the job market, the Fed has the flexibility to keep waiting. “We continue to expect the Fed to keep rates unchanged in its June meeting, while moving forward with a cut in July,” Caldwell says.
Over the past month, bond futures traders have dramatically pared back their expectations for a rate cut in July, and they are now looking ahead to September. They see a 16.5% chance of a July cut, according to the CME FedWatch Tool, compared with 25.0% odds a week ago and 57.0% odds a month ago. The odds of a September cut are 55%, up from 28% a month ago.