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The U.S. labor market did downshift in May, but Friday’s jobs report offered better than expected numbers showing that hiring continues to outlast inflation and economic turmoil.
May’s jobs report from the Bureau of Labor Statistics showed that U.S. employers added 139,000 jobs — the weakest employment gains of the year so far but above economists’ expectations of 125,000. The numbers are still a drop from last month’s (a stronger-than-expected 177,000 jobs, which was downwardly revised to 147,000) and are lower than the yearly average.
The report still marks the slowest pace of hiring since 2023 and could intensify concerns about the economy’s momentum heading into the second half of the year. But the jobs numbers suggest that employers aren’t slamming the brakes on hiring just yet — they’re just tapping them.
The unemployment rate held steady at the expected 4.2% (for the third-straight month), and average hourly earnings climbed 0.4% from a month earlier (a bigger gain than expected). Hourly earnings are up 3.9% from last year, underscoring that wages remain strong even as hiring cools.
Still, some of the underlying metrics in the report hint at a softer labor market ahead. The labor force shrank by 625,000 in May, and the participation rate slipped two-tenths of a point — a sign that fewer Americans are even looking for work. Meanwhile, the number of unemployed ticked up for the fourth month in a row, the longest such stretch since 2009.
Job growth also looks a little weaker in retrospect: March and April’s numbers were revised down by a combined 95,000 jobs, suggesting the labor market was already losing altitude earlier this spring. The tone of the labor market appears to be shifting: from resilient to reluctant.
And the unemployment number may mask deeper signs of weakness, especially outside the health care sector, which continues to account for a disproportionate share of 2025’s job gains. Outside of healthcare — which accounted for 78,000 new jobs in May and nearly 40% of all employment gains this year — hiring was mostly flat. Leisure and hospitality added 48,000 jobs, but sectors such as manufacturing lost ground, shedding 8,000 positions. The federal government (through the Department of Government Efficiency) cut 22,000 jobs, bringing total losses in that sector to 59,000 since January.
As a whole, the jobs report comes amid mounting signs that businesses are tightening their belts. Private payrolls rose just 37,000 in May, according to ADP, sharply missing expectations and marking a continued deceleration from earlier in the year.
Weekly jobless claims have crept up to an eight-month high, and recent earnings calls and announcements have suggested a more defensive hiring stance. The number of open jobs has come back down to align more closely with the number of unemployed workers — a far cry from mid-2022, when there were roughly two openings for every job seeker.
Still, companies appear more cautious than panicked. Layoffs remain modest, and employers seem somewhat inclined to hold onto workers rather than aggressively slash their headcount. Many companies are still seeing enough demand to justify hiring, even if they’re no longer expanding at the pace of the last few years.
That caution may reflect the growing list of economic uncertainties. Businesses are contending with high interest rates, persistent inflation, and uncertainties linked to trade tensions and high tariffs implemented by the Trump administration. So far, the impact of those tariffs on hiring appears limited, but economists say they could weigh on growth as the year progresses.
“The May jobs report will likely indicate that labor market dynamics slowed last month as elevated policy uncertainty, tariffs, and reduced immigration flows weighed on employment growth,” EY senior economist Lydia Boussour wrote in a note.
Preston Caldwell, the senior U.S. economist at Morningstar (MORN-0.74%), said, however, in a pre-release note that “it’s too early for tariffs to be having much impact on labor markets” because there’s an inevitable lag and tariffs didn’t show up in any significant way in the April jobs report. Still, from persistent inflation to trade tensions and tariffs, businesses face a murkier environment than they did earlier in the year — and are proceeding more cautiously.
“The latest jobless claims data are signaling looser labor market conditions,” Oxford Economics lead analyst Nancy Vanden Houten wrote in a pre-release note to clients.
Unemployment claims are also trending upward, adding to the picture of a labor market losing steam. Weekly jobless claims rose to 247,000 in the final week of May — the highest level in eight months — according to the Labor Department. And elsewhere, the labor market is fraying. Employers such as Procter & Gamble (PG-0.29%) and Microsoft (MSFT-0.92%) have announced thousands of job cuts in recent weeks, citing cost pressures and fading consumer demand.
The May jobs report reinforces the Federal Reserve’s wait-and-see approach to interest rate cuts. Fed Chair Jerome Powell and his colleagues at the central bank have signaled that they’ll hold interest rates steady (between 4.25-4.5%), despite pressure from President Donald Trump (who has called for interest rate cuts — repeatedly). The Fed likely won’t react to just a single month’s report, but a string of cooler data could strengthen the case for rate cuts later this year.
Wall Street, for its part, seems largely unfazed. Markets rose in early trading Friday, with S&P 500 futures up 0.8% and bond yields nudging higher, reflecting investor confidence that the economy is cooling gradually — not falling off a cliff.