EconoFACTS

June 06, 2025 | 09:33

U.S. Employment Still Resilient but Tariffs Start to Leave a Mark

Economist

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

Scott Anderson , Ph.D.

Chief U.S. Economist and Managing Director
Economics

Scott Anderson is BMO’s Chief U.S. Economist and Managing Director. He analyzes and forecasts U.S. national and ... (Read more)

On the surface, the May employment report was another resilient one. But lurking just below the surface is growing evidence that tariffs and related uncertainty are starting to leave a visible mark in a number of areas. Nonfarm payrolls increased a better-than-expected 139k last month, above our 125k estimate and the consensus 126k, though there was a net downward revision in jobs over the past two months of 95k. So, the headline May job gain isn’t as impressive as it seems at first blush.

It was good enough, however, for the average monthly nonfarm payroll growth over the past three months to improve to 135k from 123k in March, making it the second consecutive month of improvement in this metric. However, this is probably looking too closely in the rear-view mirror. A number of other labor market indicators show signs of increasing labor market stress. Household employment dropped by a whopping 696k in May as the labor force shrank by 625k. This kept the unemployment rate relatively stable at 4.244%, but is hardly a sign of labor market strength and resilience.

Employment in manufacturing dropped by 8k, the sector's worst performance since January. Construction employment growth also slowed to 4k from 7k in April, unusual during the Spring home selling season. There was also stinging net job losses coming from temporary help firms, retail trade, and the Federal government. These sectors are likely feeling the combined strain from tariffs and DOGE-driven Federal spending cuts. Health care continues to create the majority of the net new jobs. The education and health care sector added another 87k jobs last month, while job growth in financial services and information sectors also improved a bit.

Another bright spot comes from earnings growth that outperformed forecasts and will keep real incomes on a solid trajectory and support consumer spending growth near-term. Average hourly earnings increased 0.4% in May, up from 0.2% in April, with year-on-year growth holding at a solid 3.9%.

Bottom line: Nothing in the May employment report will push the Fed off the sidelines earlier than the markets currently expect. The steady unemployment rate and improvement in the three-month average of monthly job gains will keep the Fed firmly in the wait-and-see camp. With that said, cracks in the façade of labor market resilience are now starting to show and the longer the tariff uncertainty and government spending cuts continue the worse the labor market reports are bound to be. Signs of net job loss in manufacturing, temporary help, retail trade, and government are tell-tail signs of that damage.

Table 1 - United States — Employment

(change in thousands)

Source: BMO Economics, Haver Analytics