Wall Street forecasts 190,000 new jobs and a 3.9% unemployment rate.
Is the U.S. job market and broader economy finally feeling the sting of high interest rates? Hiring appears to be slowing, but the extent remains unclear. Here’s what to watch for in the May U.S. jobs report due Friday morning.
The Forecast
Economists expect the economy to add 190,000 jobs in May, up from a preliminary 175,000 in the prior month. On the surface, this increase suggests a continuation of the strong labor market. However, the details will be critical.
Most hiring over the past year has been concentrated in three sectors: health care, leisure and hospitality, and government. If this trend continues, it could indicate a softening labor market. Furthermore, other surveys suggest fewer companies are hiring. For example, job openings fell to a three-year low, and ADP reported the smallest increase in new jobs since late 2023.
Despite this, the economy has added an average of 245,000 new jobs per month in the first four months of the year. The Federal Reserve aims to see employment growth drop to 150,000 or even 100,000 a month to ease the tight labor market and reduce inflationary pressures.
Unemployment
The unemployment rate is forecast to remain at 3.9%, marking the 27th consecutive month under 4%. The last time this happened was in the early 1950s. There’s a chance the jobless rate could exceed 4% as more people enter the labor force post-graduation, potentially inflating the rate if they don’t find jobs immediately.
As long as the unemployment rate stays low, the U.S. is likely to avoid a recession. Historically, the jobless rate has exceeded 5% during every recession since World War II. Businesses are currently reluctant to cut staff due to the difficulty in finding labor, and mass layoffs are likely only if the economy significantly worsens.
Wages
Average hourly wages are expected to rise by 0.3% in May, slightly faster than the Federal Reserve’s target. Typically, wages increase by 0.1% to 0.2% per month in a low-inflation environment. The Fed aims for wage growth to return to pre-pandemic levels.
In April, wages increased at a 3.9% annual rate, about one percentage point higher than the pre-pandemic average.
Fed Reaction
Any job growth above 175,000 is likely to delay Fed interest rate cuts. Wall Street currently forecasts the first rate cut in September. However, if employment growth drops below 150,000 and the May report shows signs of a weakening labor market, investors might expect a Fed rate cut as early as July.
“May employment data will be crucial for either reaffirming or contradicting a growing market realization of the downside risks for a previously resilient U.S. economy,” Citibank economists noted. They belong to the bearish camp.
Stay tuned for the May jobs report to understand whether the economy is truly weakening or if it remains resilient in the face of high interest rates.