The May jobs report blew past economists' expectations, but an increase in the unemployment rate and some underlying softness in other areas of the labor market should keep the Federal Reserve on course to leave interest rates unchanged at the next Fed meeting, experts say.
Nonfarm payrolls increased by 339,000 last month, the Bureau of Labor Statistics said Friday, or well ahead of estimates for the addition of 195,000 new jobs. Upward revisions to the April and March figures revealed that employment for both months combined was 93,000 greater than originally reported.
The U.S. economy has added an average of 341,000 jobs per month over the past year despite the Fed raising interest rates at the fastest and steepest pace since the late Carter and early Reagan administrations. Market participants widely expect the Fed's rate-setting group – known as the Federal Open Market Committee (FOMC) – to enact what's being called a "hawkish pause" when it convenes in mid-June.
Although the headline payrolls data gives ammunition to committee members who favor another quarter-point increase in the short-term federal funds rate, most experts believe a pause is still the most likely outcome. Market participants also expect a pause in rate hikes. Interest rate traders currently assign a 65% probability to the FOMC standing pat on interest rates at its mid-June meeting, according to CME Group.
And given what experts are calling a "mixed" and "messy" jobs report, a pause in rate hikes certainly looks to be in order.
For example, the unemployment rate, which is derived from a separate survey, unexpectedly rose to 3.7% from 3.4% a month ago. Economists forecast the unemployment rate to tick up to 3.5%. Then there's wage growth. Average hourly earnings rose just 0.3% in May, vs a downwardly revised 0.4% gain the previous month. Moreover, hourly earnings rose only 4.3% year-over-year, the smallest increase since mid-2021.
And in a concerning development regarding demand, the average workweek fell to its lowest level since April 2020. Employers often cut back on worker hours when they see signs of slowing business activity.
With the May jobs report now a matter of record, we turned to economists, strategists, investment officers and other experts for their takes on what the data mean for markets, macroeconomics and monetary policy going forward. Please find a selection of their commentary, sometimes edited for clarity or brevity, below.
Jobs report: the experts weigh in
"Nonfarm payroll growth blew past expectations in May, increasing by 339,000 compared to a Bloomberg consensus forecast of 195,000. Yet, recent signals from key Fed officials have been dovish and more consistent with a June 'pause' or 'skip.' We continue to lean toward the FOMC leaving policy unchanged at the June meeting as the most likely outcome, but we would not be shocked by a rate hike either." – Sarah House, senior economist at Wells Fargo Economics
"The nonfarm payroll number was much stronger than expected and it is going to make a lot of noise as we approach the FOMC meeting in mid-June. The decision on the federal funds rate will probably come down to the wire and to whether Fed officials put more importance on the nonfarm payroll number or on the household survey number, which is from where the rate of unemployment is calculated. Employment in the nonfarm payroll survey was completely the opposite to what the household survey showed." – Eugenio Alemán, chief economist at Raymond James
"A surprisingly robust pace of payroll gains for May – stronger than the highest estimate in Bloomberg's survey of economists – underscores the difficulty of getting a clean read on the labor market. In our view, the labor market is softer than the headline figure suggests, with household employment actually contracting in May." – Anna Wong, chief U.S. economist at Bloomberg Economics
"There's just not enough people to go around. The economy wants to grow, but companies need people to achieve that growth. The tight labor market has forced companies into a constant state of hiring – through good times and bad." – Andrew Crapuchettes, CEO at RedBalloon
"The Fed is in a tough spot. The job market was hot in May but some suggest the labor market is not the primary source of current inflationary pressures. As the San Francisco Fed indicates, labor costs do not have a meaningful impact on sticky inflation. The Fed will still likely pause later this month, despite today's payroll report because policy makers are focused on the lagged effects of the previous rate hikes. Most voting members of the FOMC do not believe the economy has felt the full impact of tighter financial conditions. If they pause this month, there is a growing expectation that the Committee will hike in July if the economy continues to run hotter than expected." – Jeffrey Roach, chief economist at LPL Financial
"The U.S. economy continues to roll along with the labor market showing significant resilience. The hikes until this point have still yet to cool the labor market and likely will force the Fed to consider whether they have done enough to cool the underlying problem, inflation. All in all, things are normalizing but we are in and will likely remain in a structurally tight jobs market. As we've said all year, we see no rate cuts in the near to mid future." – John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors
"The best way to describe the May payroll report is 'messy' due to rising unemployment and weak wage growth. You might be asking how can the unemployment rate rise when there is strong payroll growth? Well, the labor force rose by 440,000 in May and minority unemployment is suddenly rising. Average hourly earnings rose 0.3% in May by 11 cents to $33.44 per hour. In the past 12 months, hourly earnings rose by 4.3%. Overall, the May payroll growth should help convince many FOMC members to not raise key interest rates at its June meeting." – Louis Navellier, chairman and founder of Navellier & Associates
"Now that the debt ceiling issue seems to be resolved, it is no longer sucking all the air out of market discussions. And then just in time we got a stronger-than-expected jobs report. This report may once again tip the balance of sentiment toward inflation concerns, and away from recession, extending the concept of the 'longest-ever anticipated recession that has not yet materialized.' According to our sentiment indicators, equity investors remain cautiously optimistic. The concept of 'good inflation' – inflation that signals economic strength – has overtaken the 'bad inflation' scenario, which suggests declining profit margins and continued Fed tightening, driving recession. At least for now, that is…" – Melissa Brown, managing director of applied research at Qontigo
"We did see the unemployment number rise, but I don't think that's a huge sign of trouble or a recession. Yes, we're headed for a slowdown, but I don't think it's clear yet if we get to a recession. The unemployment numbers going up tells me you do have some more people rejoining the workforce. It probably signifies that people who have been kind of living based on savings and maybe some hold over assets, they're having to go back to work now." – Tim Courtney, chief investment officer at Exencial Wealth Advisors
"It is indeed unlikely that, after the first approval of the debt ceiling bill, we will see any additional trouble in this regard. Jobless claims and manufacturing orders show an extended drop, and the feeling is a cautious optimism across all asset classes, as U.S. treasury yields fall and equities rise. Overall, data suggest that the market is even more confident in its expectation of a pause from the Fed, as macro data is finally showing a recovering economy." – Marco Santanché, quant fellow at Hedder
"Overall, the non-farm payroll increase will confirm to the Fed that the employment market is not weakening to a degree where they can begin to think about lowering rates, but there is enough here to allow them to consider skipping a rate increase at this month's meeting. The employment data reflects the uneven economic data we have been getting. Areas of weakness being offset by areas of strength within an economy that remains resilient. The data indicates those affected by job cuts have, so far, been able to find other employment but wage pressures are easing as reflected in the average hourly earnings increase of 0.3%. The Fed is no longer falling behind inflationary pressures but the strength of the job market remains a risk factor for longer-term inflation." – Steve Wyett, chief investment strategist at BOK Financial
"The U.S. labor market continues to look resilient as employers hire more workers than most economists expected for another month. This data should give the Fed more comfort to continue tightening at the June meeting and, as we advise our clients and work to help them achieve their goals, it's something we will give strong consideration." – Eric Merlis, managing director, co-head of global markets at Citizens
"Depending on how you slice it, today's labor market data provides a little flavor for everyone no matter what side of the fence you are on. On balance, the employment data is reflective of the divided views at the Fed and while this provides some backdrop of uncertainty for Fed policy to increase rates at the upcoming meetings, it most certainly means there likely won't be rate cuts any time soon." – Charlie Ripley, senior investment strategist at Allianz Investment Management
"Numbers like this could help Jerome Powell and his colleagues go on vacation this summer. The report shows steady growth continues in the job market without inflation running out of control. Higher unemployment and moderate wage gains reflect the best of both worlds. It's getting easier for the Fed to say 'mission accomplished.' Slowly but surely, Goldilocks is sneaking into the picture. The May numbers also showed a modest slowdown in manufacturing consistent with the PMI numbers. That helps suggest demand for goods has slowed enough for supply chains to catch up, another sign of inflationary risks easing." – David Russell, vice president of market intelligence at TradeStation
"The headline nonfarm payroll number came in, yet again, above consensus, [and was] the strongest reading since the turn of the year. And, like the ADP survey that came out on Thursday, made a mockery of the market estimate. The headline has now fooled the consensus to the high side for fourteen straight months. There were also upward revisions to the prior two months. So the narrative is that this is a horrible number for the Treasury market (the knee-jerk reaction has been a mild backup in yields) and that the Fed now must certainly tighten at the mid-June FOMC meeting." – David Rosenberg, founder and president of Rosenberg Research
"The May jobs report was a difficult one to parse, with a wide disparity in the two source surveys. The household survey was weak, showing increased unemployment, but the establishment survey beat expectations with 339,000 new jobs. The Fed had a high bar for a June hike and will likely not raise rates, but it's difficult to rule out a July hike if forthcoming inflation data is strong." – Curt Long, chief economist at the National Association of Federally-Insured Credit Unions
"The payroll survey says the economy is still rapidly adding jobs, while the household survey says that the long-expected softening of the labor market has begun. The details in the payrolls report were weaker than the headline, with the average workweek shortening, average weekly earnings flat on the month, and aggregate hours worked across the private sector basically flat since January. More clearly, the household survey says a margin of slack is opening in the job market. For the Fed, the higher unemployment rate, slower wage growth, and flat average weekly earnings are solid arguments for holding interest rates unchanged at their next decision in mid-June." – Bill Adams, chief economist at Comerica Bank
"The acceleration in payrolls, coupled with a recent upturn in job openings, suggests that American businesses are still aggressively hiring, likely to meet resilient consumer demand. However, the other areas of softness in this report suggests that the labor market is losing steam. In light of a recent downward revision to unit labor costs data, the Fed will take further comfort from the gradual moderation in wage growth. There's likely enough pockets of softness in this report for the FOMC to pass on raising rates at the next meeting, though another strong payrolls gain in June, coupled with another disappointing inflation report, could set the stage for a rate increase in July." – Sal Guatieri, senior economist at BMO Capital Markets
"How can we talk about a soft landing when jobs growth is accelerating? The U.S. labor market is proving resilient in the face of 14 months of interest rate hikes, but it might be too resilient for the Fed to feel comfortable. Combined with last week's persistent reading of core PCE, acceleration in service sector jobs growth suggests rates are more likely to rise this year than they are to fall." – John Leer, chief economist at Morning Consult
"Markets seem to be focusing on the 'good' news that the unemployment data is in line with Fed's expectations and there was not a material increase in wages. Given the new highs in the S&P 500 this year, it seems that, at least for stocks, the Confirmation Bias is in full effect as investors are only looking for the evidence that reinforces their pre-existing thesis. In this case, it is that the Fed will need to stop raising interest rates and Pause/Skip at their next meeting. This would imply that the Fed would be comfortable with prices continuing to climb – remember last Friday that Core PCE ticked higher – along with consistent gains in jobs and wages. These elements usually combine to push inflation higher, which would likely mean that the Fed may have to push rates higher to bring that price pressure down. This means that stocks could come to a reckoning as the Fed may have to hold rates higher for longer than is currently being priced in at these levels." – Brian Mulberry, client portfolio manager at Zacks Investment Management
