The job market in May appears to have experienced a marked slowdown as employers and consumers brace for higher tariffs and significant economic uncertainty. Economists are closely tracking these changes, particularly as they anticipate how the labor market will respond in the coming months.
On Friday, the Bureau of Labor Statistics is expected to release nonfarm payroll data, projecting an increase of approximately 125,000 jobs for May. This number reflects a notable decline from April's revised figure of 177,000, marking a downward trend compared to the year-to-date monthly average of 144,000. Though this slide is concerning, it is not catastrophic. The market's reaction will largely depend on the extent of the downturn.
According to Julien Lefargue, chief market strategist at Barclays Private Bank, if the new report shows around 100,000 job additions instead of the expected 125,000, it may not be perceived as alarmingly negative. Conversely, if the figures fall below 100,000, it could reignite fears of a recession, while a stronger report could inadvertently drive up Treasury yields.
Various sentiment indicators, including surveys in manufacturing and services sectors, show diminishing optimism about economic prospects. Concerns over tariffs and their potential inflationary effects are at the forefront of these worries.
Recent data from ADP revealed that private sector job growth was virtually stagnant, with only 37,000 new jobs added in May—marking a two-year low. Additionally, jobless claims have been on the rise, reaching levels not seen since October. The upcoming payroll report could thus serve as a crucial indicator of the labor market's health, which is vital since consumer spending accounts for nearly 70% of the U.S. economy.
Analysts like Dan North, a senior economist at Allianz Trade North America, predict a slowdown in economic activity due to the impending impact of tariffs. While there is general discontent surrounding the economy, North suggests that the concrete data available is not overly alarming. He believes that it may take several months for consumer sentiment—as reflected in surveys—to influence key economic metrics such as payroll numbers.
Markets are keenly observing ongoing trade discussions as President Donald Trump navigates a 90-day negotiating period aimed at potentially reducing certain tariffs. Experts anticipate a noticeable impact from these tariffs on economic performance, albeit not a sudden crash in hiring this month or the next.
Wall Street firms provide a range of predictions for May's payroll growth, with Goldman Sachs estimating an increase of only 110,000 jobs, while Bank of America anticipates a more optimistic figure of around 150,000. As traders digest these forecasts, the focus will also be on how the latest job numbers might affect Federal Reserve policy. Currently, investors are not expecting additional interest rate cuts until September.
The Federal Reserve is prioritizing inflation concerns stemming from tariff-related pressures, while closely monitoring employment figures. Fed Governor Adriana Kugler expressed optimism about the labor market's resilience, noting that current data suggest steady employment growth, with demand and supply in the labor market roughly balanced.
The consensus among economists is that the unemployment rate is likely to remain stable at 4.2%. Furthermore, average hourly earnings are projected to increase by 0.3% from the previous month and show an annual growth rate of 3.7%. This wage growth is crucial for maintaining consumer spending, which is a driving force behind the overall economy.
As we await the release of the May employment report, the interplay between hiring trends, economic sentiment, and external factors such as tariffs becomes increasingly significant. The implications of these dynamics will be closely watched by both investors and policymakers, as they could shape the direction of the economy in the months ahead.
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