Job Growth Slowed in May, but the Labor Market Remains Healthy for Now

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 prepandemic 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.

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.

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 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 tariffs on demand.”

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 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.