The first Friday of the month is imminent, which means the highlight of a heavy data week on the calendar will be the US monthly labour market report for May. Amid great uncertainty over trade, tariffs and the potential economic implications, the labour market Stateside remains in relatively decent health. Key will be if some firms are holding off by pausing or slowing hiring until there is more clarity on economic conditions. Have the tremors from Liberation Day fed through (yet) into weaker hiring, and likewise for the DOGE spending cuts and their potential impact on federal employment figures?
Cooling jobs growth is expected in the coming months as businesses have to adjust to the broad uncertainty and steep declines in consumer sentiment. That should lead to less hiring and investment, though the ‘hard’ data hasn’t yet followed softer survey figures released recently.
Market Expectations, other employment indicators and the Fed
Consensus expects headline May payrolls to rise 130k, a decline from the 177k in April and downwardly revised 185k in March. The three-month average currently sits at 155k and the 12-month at 157k, with the largest increases in healthcare and social assistance. Jobs growth, which is closely aligned with population growth, should be good enough to keep the unemployment rate steady at 4.2% and earnings growth one-tenth higher at 0.3% m/m and 3.6% y/y.
Other job gauges have been mixed. Weekly jobless claims data that coincides with the BLS survey window for the jobs report showed initial claims at 226k (versus 216k in the April survey window), and continuing claims at 1.919mln (versus 1.833mln in the April window). The Conference Board’s monthly consumer confidence data showed views of the labour market weakening in May, though the outlook was less negative. Additionally, consumers’ outlook for their income prospects turned positive in May. This week’s job openings figures (JOLTs) signalled ongoing resilience in the labour market.
Regarding the Fed and their dual mandate balance between price stability and still above-target inflation, and a “solid” labour market, the recent FOMC meeting minutes noted that risks of higher inflation and higher unemployment have risen recently. In addition, officials saw risks of the labour market weakening in the coming months and said that it could face difficult trade-offs if inflation is persistent while the labour market weakens.
Market reaction
It seems only a matter of time before the labour market deteriorates with so much uncertainty and lack of trust in US trade policy. This lack of clarity likely means a reluctance to hiring and investment in the months ahead, which could hasten the Fed to cut rates again as unemployment rises. There are currently just under two 25bps priced in for this year, with the first one seen in September.
A weak report on Friday would potentially see this brought forward with more than two cuts becoming more probable. That would hit the dollar and see it test the long-term low just below 98 on the Dollar Index. That said, any positive NFP surprise would back up the resilient theme in employment and push any Fed action further out, which should help underpin some support for the beleaguered greenback, at least in the short term.