Labor Market Update: May 2025

Key Data Points

April's labor market data showed resilience amid cooling trends:

• Non-farm Payrolls: +177k (vs. 138k expected, 120k whisper).

• Private Payrolls: +167k (vs. 125k expected).

• Revisions: Prior two months cut by 58k.

• Hours Worked: Flat at 34.3 (upwardly revised).

• Average Hourly Earnings: +0.2% MoM, 3.8% YoY (below expectations).

• Unemployment Rate: Steady at 4.2%.

• Prime Age Employment Rate: Rebounded after two-month decline.

The report reflects a "Goldilocks" scenario—solid but not overheated. However, linear cooling persists, with hires rates low and slack building.

Analysis

The labor market continues its steady cooling trajectory, predating recent policy shifts. Key observations:

• Payroll Trends: 3-month average payroll growth at 155k (up from 133k), private payrolls at 148k (up from 119k), both below pre-pandemic averages (178k and 167k).

• Cyclical Sectors: Construction led gains, with cyclical employment up 11k for the third straight month.

• Temporary Help: +3.6k, first gain since December.

• Red Flags:

  • Permanent job losers hit a cycle high as a share of the labor force.

  • Unemployment duration continues to rise.

  • Wage growth slowed to 2.6% annualized over three months.

  • Manufacturing hours down 0.5% in April, 0.9% YoY.

  • Prime age employment rate contracted for three months despite April's recovery.

JOLTS data reinforces stasis: job openings disappointed, while quits, hires, and layoffs remained unchanged. Tariff effects are not yet visible but may emerge in May or June data. For now, trade policy uncertainty adds headwinds to an already sluggish market.

Outlook

This report does not signal an imminent unemployment spike. Recent policy clarity suggests de-escalation in trade tensions, reducing the risk of a sharp downturn. However, without a Fed policy shift, linear cooling is likely to persist:

• Growth Constraints: Tariffs and uncertainty may cap growth below potential, keeping the Fed on hold until at least July.

• Passive Tightening: Ongoing softening in labor demand, wages, and rising unemployment mirror trends seen over the past year.

• Fed Dilemma: Absent tariff pressures, current data might justify rate cuts. Instead, the Fed remains sidelined.

Bottom Line

The labor market is resilient but stuck in neutral. While trade policy risks have moderated, the lack of momentum continues to build slack. Without proactive Fed action, the cooling trend will likely extend, with tariff impacts potentially surfacing in coming months.

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