Employment report May 2025

Slowing job growth amid dense tariff fog

• Labor market dynamics slowed in May as a thick fog of tariffs and immigration policy uncertainty weighed on employment growth. The economy added 139,000 new jobs last month following a downwardly revised 147,000 increase in April. The labor force participation rate fell a notable 0.2 percentage point (ppt) to 62.4%, helping keep the unemployment rate steady at 4.2%, as stricter immigration policy gradually weighs on labor supply.
   
• Factoring the cumulative 95,000 downward revision to payrolls gains in March and April, the three-month average gain of private sector payrolls was 135,000, compared to an average of 186,000 a year ago. Other labor market indicators also point to softer labor market conditions with initial claims for unemployment benefits rising to an eight-month high, job cut announcements up 47% from a year ago, and small businesses reporting job losses. 
   
• Many firms are choosing to retain their workforce during these uncertain times, preferring a cautious wait-and-see approach over layoffs. As the impact of tariffs start to materialize, their effect on the labor market will become more evident. Businesses facing higher costs will likely cut back on hiring further and reduce their workforce to manage increased cost pressures. We anticipate a significant decline in job market momentum leading to reduced consumer spending and a material slowdown in the US economy in H2 2025. We foresee the unemployment rate rising toward 4.8% in 2025.

Private sector employment increased by 140,000 in May, while government payrolls fell by 1,000. Although the public sector contributed significantly to job creation in 2024 (it represented a third of the increase in nonfarm payrolls a year ago), the private sector has made up the totality of the increase in payrolls over the past three months due to reductions in the federal workforce affecting public sector employment. 
 

Employment in goods-producing industries fell by 5,000 while services employment increased by 145,000. Leading the rise in services payrolls were health care (+78,000) and leisure and hospitality (+48,000), while employment in finance (+13,000) saw a modest rebound. Meanwhile, the professional and business services (-18,000 on a 20,000 decline in temporary services) and retail (-7,000) sectors both reported job losses. 
 

In the goods-producing sector, construction payrolls increased by only 4,000, which wasn’t enough to offset a decline in manufacturing hiring of 8,000. The steep tariff increase and uncertainty will weigh on industrial and construction activity in the upcoming months.
 

The government sector made a small dent to the overall payrolls gain last month, with employment falling by 1,000. A large 22,000 drop in federal government payrolls was mostly offset by a 21,000 gain in state and local employment. While federal employment is down 59,000 since January, the Department of Government Efficiency (DOGE) efforts to reduce the federal workforce will likely translate into further declines in federal employment in the coming months. 
 

On the household survey side, the unemployment rate remained unchanged at 4.2%, but it masked significant declines in household employment (-696,000) and the labor force (-625,000). The labor force participation rate fell 0.2ppt to 62.4% — matching the February 2025 level, which was the lowest rate since January 2023. The prime-age labor force participation rate (of workers aged 25 to 54 years old) also fell 0.2ppt to 83.4% and is well below its cyclical peak of 83.9% reached in July–August 2024.
 

Stricter immigration policies will curb labor force flows in the coming quarters. Immigration flows to the US have already seen a significant decline, especially at the southern border. And the US administration has been canceling and declining to renew protections and work permits of individuals through programs such as the Temporary Protected Status (TPS), which could affect hundreds of thousands of workers. This will weigh on employment in key industries like agriculture, construction, hospitality and health care, and potentially fuel renewed wage pressures in some sectors.
 

On the wage front, average hourly earnings rose more than expected, up 0.4% month over month, keeping wage growth steady at an upwardly revised rate of 3.9% year over year. Employers’ wage containment efforts amid a slowing economy may lead to a reduction in wage growth toward 3.5% in H2. 
 

For the Fed, this jobs report is unlikely to alter the current “wait-and-see” posture heading into the June 17–18 Federal Open Market Committee meeting. But together with other soft economic data this week, it provides further evidence that the economy is gradually downshifting. We believe the Fed will eventually decide to ease policy later this year with a total of two rate cuts, in September and December, as economic and labor market conditions deteriorate.