The much stronger-than-expected job gains is likely to cement a pause decision at the upcoming June 16-17 FOMC meeting, the first meeting to be chaired by Kevin Warsh.
Updated with fresh report insights, market reaction, and analyst commentary.
The U.S. Labor market has defied the uncertainties and turned in another strong monthly job numbers for May. A Bureau of Labor Statistics report released Friday showed non-farm payrolls (NFP) expanded by much more than expected, strengthening the "higher-for-longer" argument.
Breaking Down May Numbers
The domestic economy added 172,000 jobs in May compared to the upwardly revised jobs gains of 179K in the previous month. Economists had pencilled in a number of 85,000, down from originally reported 115,000 for April.
The 120K addition to the payrolls was augmented by a 52,000 increase in government jobs, which had shown anemic numbers in recent month. The NFP private payroll gains nearly matched ADP's corresponding number (122,000).
The service providing industries added 92,000 in May, although slower than the 160K+ pace seen in the previous two months. The slowdown relative to April is primarily due to the retail trade losing 1.1K jobs (+23.5K previously) and the transportation and warehousing industry adding merely 600 jobs as opposed to the 39.3K gains in April.
Job gains in the Leisure & Hospitality industry accelerated to 70K from 30K.
Goods producing industry, meanwhile, added 28K jobs, underpinned by construction (+17K). Manufacturing jobs expanded by 7K in May following no job gains in the previous month.
Among the other key numbers of the report:
- the jobless rate held steady at 4.3%, aligning with the consensus.
- the U6 unemployment rate was at 8.1% compared to 8.2% in April; The U6 employment rate is the broadest measure of labor under-utilization and it captures both underemployment and unemployment.
- the annual rate of increase in the average hourly earnings at 3.4%, in line with estimate but slower than April's 3.6%; the monthly rate of the metric was 0.3%, also aligning with the consensus.
The March employment change was also upwardly revised by 29,000 to 214,000.
While the jobless rate remained unchanged, the number of unemployed people was also little changed at 7.3 million. The labor force participation rate was unchanged at 61.8%.
Commenting on the report, Harris Financial Group Managing Partner Jamie Cox said the May jobs report debunked the thesis about artificial intelligence (AI) eventually killing jobs. "It’s also very difficult to remain anchored to a stagflation narrative when growth and employment are rising," the strategist said.
Weighing in the spike in yields across the whole curve, economist Mohamed El Erian said the market is now fully pricing in a rate hike by the end of the year. The CME FedWatch Tool, which is constructed based on expectations of futures traders, now puts the odds of a rate hike at 12.6% at the July meeting, 36.6% at the September meeting, 49% at the October meeting and 68.4% at the December meeting.
LPL Financial Chief Economist Jeffrey Roach, however, sounded a note of caution. "If we see a slowdown in sales and business activity like we expect next quarter, we should expect unemployment to tick upward.."
He also raised the possibility of the energy market volatility's impact beginning to seep into labor demand if the effects of the Iran conflict linger through the summer. He also pointed to retail trade jobs as an important category to monitor, especially in the leading categories of home furnishings and warehouse clubs.
Fifth Third Commercial Bank Economist Bill Adams noted that the year-to-date average monthly job gains of 114,000 was much better than 2025's 10,000 pace. He attributed the uptrend to the tailwinds from fiscal and monetary policy, the AI boom, and an ebullient stock market, overpowering headwinds from the Iran War and higher energy prices.
Adams warned that supply-side constraints faced by the Labor market could pressure the Fed to raise rates later this year even if inflation shocks from the Middle East and tariffs fade.
How Market Reacted to Exuberant May Job Market
The loss in the U.S. index futures accelerated following the report. The E-Mini S&P 500 futures (ES) was down nearly 0.70% at last check, and the Nasaq 100 futures, which was already pressured by apprehensions regarding artificial intelligence (AI) levered names following Broadcom's Q2 earnings report, fell 1.38%.
The Mini Dow Jones Industrials futures, on the other hand, held barely up. The underlying index, the Dow Jones Industrial Average, defied the AI sell-off on Thursday and ended at a fresh peak.
The U.S Dollar Index spiked sharply to 99.61 as the report has more or less sealed the fate of the upcoming central bank's rate decision. The benchmark 10-year Treasury note yield also surged higher, topping the 4.50% as bonds retreated. Dollar-denominated assets, including commodities and Bitcoin plunged hard Friday morning.
Why the Number Matters
The May employment report assumes importance because it would be the last crucial labor market statistics that the Federal Reserve's rate-setting committee — the Federal Open Market Committee (FOMC) — would mull over before deciding the course of the monetary policy at its two day meeting that kicks off on June 16.
Odds are heavily stacked up in favor of a status quo stance as the Iran war-induced inflation complicated the monetary policy trajectory. In his first meeting as the Fed Chair, the incoming central bank chief Kevin Warsh is widely expected to adopt a wait-and-watch approach, rather than jump the gun. on rates
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