Surprisingly Strong Jobs Report

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This morning (June 5), the Bureau of Labor Statistics (BLS) released its “Employment Situation” report (often called the “jobs report”) for May. The report showed a stronger than expected increase in employment. 

The jobs report has two estimates of the change in employment during the month: one estimate from the establishment survey, often referred to as the payroll survey, and one from the household survey. As we discuss in Macroeconomics, Chapter 9, Section 9.1 (Economics, Chapter 19, Section 19.1), many economists and Federal Reserve policymakers believe that employment data from the establishment survey provide a more accurate indicator of the state of the labor market than do the household survey’s employment and unemployment data. (The groups included in the employment estimates from the two surveys are somewhat different, as we discuss in this post.)

According to the establishment survey, there was a net increase of 172,000 nonfarm jobs during May. Economists surveyed by the Wall Street Journal had forecast an increase of only 80,000 jobs.  Economists surveyed by Bloomberg had a slightly higher forecast of a net increase of 88,000 jobs. The BLS revised upward its previous estimates of employment in March and April by a combined 93,000 jobs. (The BLS notes that: “Monthly revisions result from additional reports received from businesses and government agencies since the last published estimates and from the recalculation of seasonal factors.”)

The following figure from the jobs report shows the net change in nonfarm payroll employment for each month in the last two years. The figure shows that the relatively strong employment increases of the past three months represent a break from the unusual pattern in that began in the middle of 2025 in which months of declining employment and months of increasing employment had been alternating.

These increased employment gains are not consistent with an increasingly popular view among economists that slowing labor force growth had resulted in the break-even rate of employment growth—the rate of employment growth at which the unemployment rate remains constant—having fallen to close to zero.

In fact, despite the strong increase in employment, the unemployment rate, which is calculated from data in the household survey, was unchanged in May at 4.3 percent. As the following figure shows, the unemployment rate has been remarkably stable over the past year and a half, staying between 4.0 percent and 4.4 percent in each month since May 2024. The Federal Open Market Committee’s current estimate of the natural rate of unemployment—the normal rate of unemployment over the long run—is 4.2 percent. So, unemployment is slightly above that estimate of the natural rate. (We discuss the natural rate of unemployment in Macroeconomics, Chapter 9 and Economics, Chapter 19.)

As the following figure shows, the monthly net change in jobs from the household survey moves much more erratically than does the net change in jobs from the establishment survey. As measured by the household survey, there was a net increase of 149,000 jobs in May, roughly similar to the increase in the establishment survey. But the household survey shows an overall decline in jobs during the past five months, in contrast to the net increase in jobs shown in the establishment survey. (Note that because of last year’s shutdown of the federal government, there are no data for October or November.) It’s not unusual for the two surveys to show significantly different movements in net job creation, particularly over short periods of time.

The household survey has another important labor market indicator: the employment-population ratio for prime age workers—those workers aged 25 to 54. In May the ratio was 80.8 percent, up slightly from 80.7 percent in April. The prime-age population ratio remains above its value for most of the period since 2001. The persistently high levels of the prime-age employment-population ratio indicate continuing strength in the labor market.

There have been media reports of firms, including Salesforce, Cloudflare, Coinbase, Cisco Systems, and Meta Platforms, laying off workers in information systems. The following figure shows net employment changes in the BLS employment category of “computing infrastructure providers, data processing, web hosting, and related services.” Employment in this sector has been declining during most months since the beginning of 2023, but May was an exception with a net increase of 3,700 jobs.

The establishment survey also includes data on average hourly earnings (AHE). As we noted in this post, many economists and policymakers believe the employment cost index (ECI) is a better measure of wage pressures in the economy than is the AHE. The AHE does have the important advantage of being available monthly, whereas the ECI is only available quarterly. The following figure shows the percentage change in the AHE from the same month in the previous year. The AHE increased 3.4 percent in May, down from 3.6 percent in April.

What effect is this jobs report likely to have on the decisions of the Federal Reserve’s policymaking Federal Open Market Committee (FOMC) at its next meeting on June 16–17, the first meeting with Kevin Warsh as chair? The relatively strong growth in employment during the past three months make it unlikely that the FOMC will see current conditions in the job market as warranting a cut in the committee’s target range for the federal funds rate. In addition, disruptions to the world oil market as a result of the conflict in Iran have caused oil prices to rise, putting upward pressure on the price level. The effects of tariff increases have likely not yet fully passed through to increases in prices. These factors make it likely that the committee will keep its target range for the federal funds rate unchanged at its next meeting and may even begin considering future increases in the target range. 

The probability that investors in the federal funds futures market assign to the FOMC keeping its target rate unchanged at its June meeting increased to 97.2 percent this morning from 95.4 percent yesterday. Investors now assign a higher probability to a rate increase by the end of the year than to a rate cut.