The "look under the hood" jobs report

Axios

21 hours ago

The May jobs report looks fine on the surface, but underneath there are signs of weakening in the labor market.
Why it matters: The good news is that employers kept hiring at a healthy rate in May. But a few oddities in the report signal less momentum in the job market.
What they're saying:"There are now clear trends in the data, not just vague signs, that even if the train is chugging forward, more and more people are getting left behind at the station," Cory Stahle, an economist at job search site Indeed, wrote in a note.
"This isn't a bad report, per se, but there are clear signs of erosion just below the surface that may not be apparent just by looking only at the headline numbers," Stahle said.
By the numbers: Payroll employment rose by 139,000 in May, roughly in line with what forecasters had anticipated. But the Labor Department revised down job gains in March and April by a combined 95,000 jobs.
Job growth has averaged 124,000 a month in 2025, a downshift from 168,000 in 2024.
Meanwhile, the unemployment rate was steady at 4.2% — but that masked a steep drop in the number of Americans in the labor force.
The share of adults who were employed fell 0.3 percentage points to 59.7%, the lowest in more than three years. It was due to a whopping 625,000 fewer people in the labor force — neither working nor looking for work.
The intrigue: The bulk of job creation continued to be concentrated in what Treasury Secretary Scott Bessent has called "government-adjacent" fields, including health care.
That sector added 62,000 jobs last month, above the average monthly gain of 44,000 jobs over the prior 12 months.
"The month's modest job gains were concentrated in non-cyclical sectors like healthcare," Comerica chief economist Bill Adams wrote in a note.
"Job gains in other cyclical private industries were anemic, reflecting the drag from policy uncertainty."
Of note: The federal government sector, which has been hit by DOGE-related layoffs, lost 22,000 jobs in May alone. It has shed 55,000 workers since January. (Local government employment rose by 21,000.)
State of play: The reported size of the labor force can be volatile month-to-month just due to sampling error, but the drop in May was unusually large.
It may have fallen because of potential workers becoming discouraged about job prospects, or it could be attributable to immigration cuts reducing the supply of labor, notes Nationwide chief economist Kathy Bostjancic.
No rate cuts soon
The new numbers are the worst of all worlds for those hoping for Fed interest rate cuts — including the guy in the Oval Office.
State of play: The Fed is on high alert for any meaningful deterioration in the labor market, which could trigger interest rate cuts to try to fulfill its mandate for maximum employment.
This report didn't provide that — it's hard to square a stable unemployment rate and solid payroll growth with the kind of falloff in the job market that would bring in the rate-cutting cavalry, no matter what the beneath-the-surface details show.
Meanwhile, average hourly earnings rose 0.4% in May, an elevated level that suggests some residual inflation pressure remains in the job market.
The policy-sensitive two-year Treasury yield was up a whopping 0.09 percentage points this morning on the news, reflecting expectations that rate cuts are looking more distant.
Between the lines: The Fed's policy committee meets later this month and is all but certain to leave rates unchanged, consistent with its wait-and-see mode for the impact of the trade war on the economy.
The meeting after that is in late July, but that means there will only be one more month of jobs data by then. A rate cut then also looks improbable, barring a complete collapse in the data in the weeks ahead.
It's far more plausible that by September there will be enough evidence of a downshift in the job market and economic activity more broadly.