Takeaway: Today’s jobs report will lead to higher mortgage rates as it is strong enough to open the door for Fed officials to debate hikes at the next meeting. However, the data is not clear enough to make a near-term hike likely.The strength in today’s report was mostly in job growth, with large upward revisions making the labor market look much firmer than it did yesterday.
- Employers added 172,000 jobs in May (versus 85,000 forecasted), and March and April data were revised up sharply.
- Those revisions raised the three-month hiring average to 188,000 (from 48,000 yesterday) and the six-month average to 92,000. Both had gone briefly negative at the end of 2025.
- There is now fairly solid evidence of a reacceleration in jobs growth. It is unclear how long it will last or whether it will be revised away, but QCEW data, the source data for annual benchmarks) so far suggest relatively small revisions for 2025.
- In a low immigration environment, the current pace of job growth is much stronger than just treading water.
The household survey, which provides the unemployment rate statistics, also looked better, while wage growth continued to ease gradually.
- The unemployment rate stayed at 4.3% and has now been at or below 4.5% for 56 straight months.
- Broader labor-market measures also improved, including those unemployed for a broader set of reasons than that captured by the headline unemployment rate and the employment to population rate.
- Meanwhile, average hourly earnings continues to ease, suggesting the labor market is still far from tight, which is good news for inflation.
Some of May’s sector details look a bit questionable, but hiring has broadened over the past few months.
- May’s job gains were dominated by leisure and hospitality, which added 70,000 jobs, mainly in restaurants; local government, which added 55,000; and health care, which added 35,000.
- Leisure and hospitality strength may partly reflect Memorial Day or other timing effects biasing the data.
- Strength in local government hiring may be influenced by some end-of-school-year noise.
- But looking across the past three months, the gains are broader than the May sector mix suggests, with a lot of industries hiring. The main exceptions are tech and finance.
For the Fed, this does not make a near-term hike likely, but it does increase the risk of eventual hikes.
- This report does not look strong enough to push the Fed into hiking right away, especially with wage growth still gradually easing.
- But combined with recent inflation data, it makes it easier for the Fed to move further away from an easing bias and toward a more balanced stance where the next move could plausibly be a hike. They could frame it as taking the “insurance hikes” from last fall away. Those were done in response to a rapidly weakening labor market.
- With this data, economists are now gradually moving their forecasts to expect hikes, and futures markets are now pricing in a rate hike by the end of this year and potentially another one next year.
- However, it is also worth remembering that payroll growth has had a strong seasonal tendency to decelerate in the summer months over the last few years. Today’s report raises the probability of hikes, but it is too soon to treat this strength as the new normal.
