The May employment report showed a significantly larger than expected 172,000 gain in payrolls, adding to the series of strong labor market data of late. This was further bolstered by a significant positive upward revision to the last two months’ gains, with hiring over the past three months showing to be very robust. Overall, despite the overhang from higher energy prices, the labor market appears to be firming and will surely catch the Fed's attention.
Total non-farm payrolls increased by 172,000 in May, significantly exceeding expectations for an 88,000 gain. March and April’s already strong figures were also revised higher, adding 93,000 over the two months. The three-month moving average is now 188,000, strongly outpacing the Fed’s payroll breakeven estimate (the number of jobs needed to keep employment conditions steady), reflecting momentum in the labor market despite the uncertain macro outlook.
Compared to a year ago, when conditions were softening and job gains were narrow, job growth in May was broad-based, with 8 of 11 major sectors posting gains. Healthcare continues to show steady momentum, while local government hiring has picked up. Notably, cyclical industries strengthened: gains in mining & logging, construction, and manufacturing point to an improvement in economic activity. Meanwhile, strong gains in leisure & hospitality suggest resilient consumer demand. Overall, the downstream impact from the energy shock has remained muted so far.
By contrast, the financial services sector posted meaningful job losses, with most of the weakness concentrated in insurance. The information sector, which has shed jobs for seven consecutive months, continued to decline in May. According to the Challenger, Gray & Christmas survey, companies are increasingly citing AI as a driver of job cuts, suggesting that some of the sector’s softness may reflect AI-related displacement. That said, given this sector accounts for less than 2% of total payrolls, the broader economic impact should be limited.
The unemployment rate held steady at 4.3%, while the labor force participation rate was unchanged and sits at its lowest level since fall 2021. Structural factors, such as demographic shifts and stricter immigration policies, continue to constrain labor supply, effectively lowering the breakeven level for payroll growth. As a result, if the labor market continues to post solid gains and layoffs remain contained, the unemployment rate could edge lower.
Wages grew 3.4% from a year ago, as expected, but edged down from 3.6% in April. The absence of upward wage pressures suggests that a sustained wage-price spiral is not taking hold, helping to ease concerns about runaway inflation ahead of the Fed’s upcoming meeting.
Policy outlook
This month’s report showed solid job creation across a broadening range of sectors. The pace very comfortably exceeds the Fed’s estimate of breakeven employment growth, which has been close to zero according to some estimates. With layoffs also remaining subdued, it implies a resilient picture of the labor market. This also came absent an acceleration in wage pressures, suggesting a wage-price spiral isn’t yet evident.
Nevertheless, with inflation remaining above target and expected to trend higher in the coming months as energy prices remain elevated, both sides of the Fed’s dual mandate now argue against rate cuts. If Chair Warsh pushes for cuts at his first meeting, he will be pushing against the evidence.
In fact, markets are already fully pricing in a 25bps rate hike this year—a sharp turnaround from the start of the year when multiple cuts were expected. This shift is testament to not just the inflationary impact of the energy shock, but the unexpected strength of the labor market this year. Our base case remains that the Fed stays on hold through 2026, but if employment data continues to track around May’s pace, rate hikes this year would come firmly into play in our forecast.
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