Signs of a Weaker Labor Market Trump’s immigration crackdown may be shrinking the workforce, the jobs report suggests.

 

Recent economic reports show that while the U.S. job market appears stable on the surface, there are underlying weaknesses that could pose problems ahead. In May, the economy added 139,000 jobs—slightly fewer than April’s 147,000 but still above expectations. The unemployment rate remained at 4.2%, and underemployment held steady at 7.8%.

Economist Flowers from the recruitment firm Cast points out that the job market is essentially "treading water" and is actually weaker than headline numbers suggest. Over the past year, job growth has averaged 144,000 new positions per month, the lowest since 2011 outside of the pandemic downturn.

Most new jobs are in sectors like health care, hospitality, and social services. However, these areas face risks from proposed federal spending cuts and tariffs. A pending bill in Congress could slash Medicaid funding by $700 billion and make Affordable Care Act plans more expensive, threatening the health care sector, which has accounted for about 30% of new jobs in recent years. Flowers warns that cutting health care funding could "kill the golden goose" of job creation.

Leisure and hospitality could also suffer if businesses pass tariff costs to consumers, reducing spending in those sectors. There are already signs of strain, such as declines in warehousing and retail jobs, which had previously contributed to job growth.

Job seekers are feeling the pinch: about 40% lack confidence in finding work, and nearly a third expect fewer opportunities in the next six months. Flowers describes the current environment as an "insider vs. outsider labor market"—those with jobs enjoy stability and wage growth, but it’s getting harder for new entrants, especially recent graduates, to find positions.

Growth is sluggish in knowledge-based fields like finance, marketing, sales, and software development, with some business sectors even seeing job losses. Flowers notes that while young people have long been encouraged to attend college, the jobs they aspire to are among the weakest right now. He warns of a growing mismatch: young people will struggle to find their desired jobs, while blue-collar positions remain hard to fill.

Overall, the Federal Reserve reports that business growth has slowed, prices are rising, and hiring is cooling, with heightened uncertainty leading to more cautious decisions by both businesses and households. While layoffs remain low and the unemployment rate is steady, the job-finding rate is declining, especially for those trying to enter the workforce.

The May jobs report looks fine on the surface, but underneath, there are signs of weakening in the labor market.

The good news is that employers kept hiring at a healthy rate in May. But a few oddities in the report signal less momentum in the job market.

"There are now clear trends in the data, not just vague signs, that even if the train is chugging forward, more and more people are getting left behind at the station," Cory Stahle, an economist at job search site Indeed, wrote in a note.

• "This isn't a bad report, per se, but there are clear signs of erosion just below the surface that may not be apparent just by looking only at the headline numbers," Stahle said.

 Payroll employment rose by 139,000 in May, roughly in line with what forecasters had anticipated. But the Labor Department revised down job gains in March and April by a combined 95,000 jobs.

• Job growth has averaged 124,000 a month in 2025, a downshift from 168,000 in 2024.
• Meanwhile, the unemployment rate was steady at 4.2% — but that masked a steep drop in the number of Americans in the labor force.
• The share of adults who were employed fell 0.3 percentage points to 59.7%, the lowest in more than three years. It was due to a whopping 625,000 fewer people in the labor force, neither working nor looking for work.

 The bulk of job creation continued to be concentrated in what Treasury Secretary Scott Bessent has called "government-adjacent" fields, including health care.

• That sector added 62,000 jobs last month, above the average monthly gain of 44,000 jobs over the prior 12 months.
• "The month's modest job gains were concentrated in non-cyclical sectors like healthcare," Comerica chief economist Bill Adams wrote in a note.
• "Job gains in other cyclical private industries were anemic, reflecting the drag from policy uncertainty."

The federal government sector, which has been hit by DOGE-related layoffs, lost 22,000 jobs in May alone. It has shed 55,000 workers since January. (Local government employment rose by 21,000.)

The reported size of the labor force can be volatile month-to-month just due to sampling error, but the drop in May was unusually large.

• It may have fallen because of potential workers becoming discouraged about job prospects, or it could be attributable to immigration cuts reducing the supply of labor, notes Nationwide chief economist Kathy Bostjancic.

The new numbers are the worst of all worlds for those hoping for Fed interest rate cuts, including the guy in the Oval Office.

The Fed is on high alert for any meaningful deterioration in the labor market, which could trigger interest rate cuts to try to fulfill its mandate for maximum employment.

• This report didn't provide that — it's hard to square a stable unemployment rate and solid payroll growth with the kind of falloff in the job market that would bring in the rate-cutting cavalry, no matter what the beneath-the-surface details show.

• Meanwhile, average hourly earnings rose 0.4% in May, an elevated level that suggests some residual inflation pressure remains in the job market.
• The policy-sensitive two-year Treasury yield was up a whopping 0.09 percentage points this morning on the news, reflecting expectations that rate cuts are looking more distant.

The Fed's policy committee meets later this month and is all but certain to leave rates unchanged, consistent with its wait-and-see mode for the impact of the trade war on the economy.

• The meeting after that is in late July, but that means there will only be one more month of jobs data by then. A rate cut then also looks improbable, barring a complete collapse in the data in the weeks ahead.
• It's far more plausible that by September, there will be enough evidence of a downshift in the job market and economic activity more broadly.

That's not what President Trump wants to hear. "If 'Too Late' at the Fed would CUT, we would greatly reduce interest rates, long and short, on debt that is coming due," Trump posted on Truth Social this morning. "Borrowing costs should be MUCH LOWER!!!"

• "Go for a full point, Rocket Fuel!" he later added.

The Fed isn't going to cut interest rates a full percentage point, or anything close to it, unless or until there is more decisive evidence that the job market is losing steam.