Labor market decelerating Labor market decelerating http://www.federatedinvestors.com/mmdt/static/images/mmdt/mmdt-logo-amp.png http://www.federatedinvestors.com/mmdt/daf\images\insights\article\jobs-newspaper-magnifying-glass-small.jpg June 5 2025 June 6 2025

Labor market decelerating

With inflation under control, the Fed should cut rates twice later this year.
Published June 6 2025

Bottom line

Headline nonfarm payrolls rose by a stronger-than-expected 139,000 jobs in May (consensus at 126,000, Federated Hermes at 77,000), as tariff uncertainty and fiscal policy confusion did not confirm disappointing whisper numbers last month. But March and April results were revised down by a combined 95,000 jobs, which reduces May’s gain to an adjusted increase of only 44,000 jobs, compared with gains of 147,000 in April and 120,000 in March.

Similarly, private payrolls posted a higher-than-expected increase of 140,000 jobs in May (consensus at 120,000), compared with gains of 146,000 in April and 114,000 in March. But with the combined downward revision of 77,000 jobs in March and April, May’s adjusted private payroll gain is only 63,000 jobs.

Why did we expect softer-than-consensus nonfarm payroll gains? The economy is slowing, punctuated by dual misses in the ISM data earlier this week. The ISM Manufacturing Index rose by a weaker-than-expected 48.5 in May (consensus at 49.5) versus 48.7 in April. Moreover, the ISM Services Index breached the critical 50 level— typically signaling economic contraction—for the first time in a year by falling to 49.9 in May (consensus at 52.0) versus 51.6 in April.

Other labor metrics also weak The ADP private payroll survey plunged to a disappointing gain of only 37,000 jobs in May (consensus at 114,000), which was a more than two-year low, compared with 60,000 in April. Initial weekly jobless claims surged to an eight-month high of 247,000 claims last week. Household employment in May lost 696,000 jobs, its worst reading in 18 months, compared with a healthy gain of 461,000 jobs in April. Finally, temporary help, an important leading indicator, lost 20,000 jobs in May, marking the fourth decline in the past five months.

DOGE layoffs filtering in The federal government shed 22,000 jobs in May, the most since 2020, and federal payrolls have collectively declined by 59,000 jobs over the past four months through May. But according to Challenger, Gray & Christmas, the Trump Administration has reduced government payrolls by some 370,000 federal workers and contractors over the past three months. Employees who are on paid leave or receiving severance still are counted as employed, and some workers may have already found new jobs in private industry. Bloomberg expects at least a half million US jobs could be impacted, when counting universities, contractors and those who rely on government funding.

The Fed should cut twice this year? So, while the labor market is softening, what about the other half of the Federal Reserve’s dual mandate? The CPI and PCE inflation metrics have been declining so far this year through April and are now sitting at four-year lows. The Fed’s policy-setting meeting on June 18 includes an updated Summary of Economic Projections. Officials will need to reconcile their restrictive monetary policy, as the upper band of the fed funds rate is now at 4.5%, with the fact that nominal CPI is only 2.3% year-over-year. In our view, there’s plenty of room to reduce rates down to 3% over the next 12-24 months  and expect two quarter-point cuts will come later this year. The most likely time will be September and December, and we expect the Fed to set the table for these cuts at its June and July 30 FOMC meetings, as well as its Jackson Hole, Wyo., summit on August 21-23. With the prospect of lower interest rates and no recession on the horizon, we are sticking to our guns with a 6,500-year-end target for the S&P 500 this year and 7,000 in 2026.

Other key labor-market indicators were weak:

  • ADP private payroll survey May added a much weaker-than-expected gain of only 37,000 jobs (consensus at 114,000), a two-year low versus April’s gain of 60,000. Workers who changed jobs last month saw their wages rise by 7.0% y/y, but less than half the cycle peak of 16.1% in April 2022. Job stayers in May earned a more modest 4.5% y/y raise, well below the peak of 7.8% in September 2022.
  • Initial weekly jobless claims This high-frequency leading employment indicator soared to an eight-month high of 247,000 last week, significantly higher than the May survey week’s reading of 226,000.  
  • Challenger, Gray & Christmas layoffs Employers announced that layoffs of nearly 94,000 in May were 47% higher than a year ago, but 11% below April’s 105,000.   
  • Job Openings & Labor Turnover Survey (JOLTS)  April job openings surprisingly surged  2.7% month-over-month (m/m) to 7.391 million, up from 7.2 million in March, and 39% below a record 12.182 million job openings in March 2022. The rate of openings rose to 4.4% from a six-month low of 4.3% in March, but still well below a record 7.4% in March 2022.  The ratio of available job openings for every unemployed worker held steady at a four-year low of 1.0 in March, down sharply from a peak of 2.0 in March 2022.

Unemployment and labor impairment rates steady, participation rate falls Household employment (an important leading employment indicator) plunged to an 18-month low of a loss of 696,000 workers in May, compared with a robust gain of 461,000 in April and 201,000 in March. The unemployment rate remained at 4.2% for the third consecutive month, lower than July 2024’s three-year high of 4.3%, but still well above April 2023’s 53-year low of 3.4%. The Fed expects it to reach 4.4% by year-end.  

The labor impairment rate also held steady, at 7.8% in May. That is down from 7.9% in March and 8.0% in February (its highest reading since 2021). But it’s still well above the cycle low of 6.6% in December 2022. The participation rate surprisingly dropped to a two-year low 62.4% in May from 62.6% in April, likely due to a decline in immigrant labor. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020.  

Wage inflation and hours worked steady Average hourly earnings rose by a better-than-expected 0.4% m/m gain in May, double April’s 0.2% m/m gain. But wages held steady for the fifth consecutive month at a faster-than-expected 3.9% y/y pace (consensus at 3.7%) in May. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked remained steady at 34.3 in May for the third consecutive month, up from 34.2 in February and 34.1 in January. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to change a worker’s hours before they alter their staff size.

K-shaped recovery gap narrows The unemployment rate for highly educated workers rose to 2.6% in May from 2.5% in April, but still up from September 2022’s cycle low of 1.8%. But that for less-educated workers plummeted to 5.5% in May from 6.1% in April.  While still higher than its 31-year low of 4.4% in November 2022, this mix shift likely contributed to steady wage gains last month.

Sector details mixed:

  • Temporary help (an important leading employment indicator) lost 20,000 jobs in May for the fourth time in five months, after adding 3,000 in April but losing 14,000 in March, 2,000 in February and 8,000 in January. This sector has lost jobs in 34 of the past 37 months.    
  • Manufacturing lost a worse-than-expected 8,000 jobs in May (consensus at a loss of 5,000 jobs), down from gains of 5,000 in April, 1,000 in March and 8,000 in February, after sustaining losses in five of the previous seven months.
  • Construction added 4,000 jobs in May, 7,000 in April, 5,000 in March and 12,000 in February, as the brutal winter weather has transitioned to spring. The sector lost 3,000 jobs in January. In the aftermath of last year’s hurricanes and wildfires, we still expect construction to accelerate in the spring and summer from rebuilding.
  • Retail lost 7,000 jobs in May and another 3,000 in April, after adding 16,000 in a strong March and losing 2,000 and 8,000 jobs, respectfully, in a weak February and January.  Retail sales enjoyed a strong March during the Easter/Passover season but appear to be treading water until we get into the important Back-to-School season starting in June.
  • Leisure & hospitality hiring surged by 48,000 jobs in May, on the heels of adding 29,000 in April and 45,000 in March.  The sector shed 34,000 in February and 14,000 in January, likely due to bad winter weather. The sector added 47,000 jobs in December and 54,000 in November.

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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Institute of Supply Management (ISM) nonmanufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

Personal Consumption Expenditures Price Index (PCE): A measure of inflation at the consumer level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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