U.S. job growth accelerated again in May, defying expectations for a slowdown, even as the unemployment rate rose to the highest level in more than two years.
Employers added 272,000 jobs in May, the Labor Department said in its monthly payroll report released Friday, easily topping the 185,000 gain forecast by LSEG economists. But the unemployment rate unexpectedly inched higher to 4% against expectations that it would hold steady at 3.9%. It marked the highest level for the jobless rate since January 2022.
Wage growth also remained strong last month, with average hourly earnings — a key measure of inflation — rising 0.4%, more than expected. On an annual basis, wages increased 4.1% in May.
“The May jobs report sent conflicting messages,” said Bill Adams, chief economist for Comerica Bank. “Payrolls rose solidly and wage growth picked up, signs the labor market is still running hot. On the other hand, the unemployment rate rose, recent job growth has been concentrated in part-time jobs, and temp jobs fell, signs the labor market is cooling.”
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Markets are closely watching the report for evidence the labor market is continuing to soften after months of solid job gains as Federal Reserve policymakers weigh when to start cutting interest rates. Although inflation has fallen sharply from a peak of 9.1%, progress has cooled sharply since the summer.
Policymakers have signaled they are in no rush to cut, and that incoming economic data will guide their decision.
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“One step forward, two steps back,” said Seema Shah, chief global strategist at Principal Asset Management. “Today’s data undermines the message that other recent economic data have been giving of a cooling U.S. economy, and slams the door shut on a July rate cut. Not only has jobs growth exploded again, but wage growth has also surprised to the upside – both moving in the opposite direction to what the Fed needs to begin easing policy. “
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Stocks sank in early trading on Friday as the report dashed investor hopes for more imminent rate cuts, while bond yields spiked. The odds of a September rate hike fell to about 56% after the surprisingly hot report, according to the CME Group’s FedWatch tool, which tracks trading. That marks a decline of about 12 percentage points from the previous date.
Continued job growth “could help keep inflation more buoyant and delay Fed rate cuts to later this year or into next year,” said Kathy Bostjancic, Nationwide chief economist. “We had been anticipating the start of rate cuts in September, totaling 50 basis points of cuts this year, but the persevering strong employment gains raises the likelihood of later rate cuts.”
Health care continued to lead the way in job creation, onboarding 68,000 new workers in May. Other sectors showing notable growth included the government (43,000), leisure and hospitality (42,000), and professional, scientific and technical services (32,000).
The report also showed modest revisions to job gains earlier this year. Gains for March were revised down by a total of 5,000 jobs to 310,000, the government said, while April’s gain also came in slightly lower at 165,000 jobs.
The labor market has remained historically tight over the past year, defying economists’ expectations for a slowdown.
Economists say it is beginning to cool after last year’s blistering pace, but is still nowhere near breaking
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