Surprising Job Report Eliminates Chance of Interest Rate Cut

It would appear that reports of the premature death of the US. .labor market had been greatly exaggerated.

Not only did the BLS report a strong labor market report for April in early May and a strong report for March in early April, but now we have a strong report for May here in early June. Three consecutive months of aggressive hiring across the U.S. economy is no blip on the radar. This is now a trend. Friday morning’s release was, in a way, even better than the past two, as with it came upward revisions to those two months and an implication that much of May’s job creation was of the full-time variety. Let’s explore, shall we?

Looking over the Establishment Survey, we see that job creation in the form of non-farm payrolls for May printed at 172,000 added positions, well above the 105,000 that had been the consensus view and well above many respected Wall Street economists who were lower than that (including your author). In addition, the NFP prints for March and April were revised higher from 185,000 and 115,000 to 214,000 and 179,000, respectively. That puts non-farm hires for the month up a net 265,000, which is just stunning considering where economists had the economy.

Now, we’ll look at the Household Survey. That particular survey shows 149,000 more employed persons for the month and 66,000 fewer unemployed persons. It’s nice to see these two surveys rowing the boat in the same direction for a change. The number of individuals dropping out of the labor force in May increased by only 17,000 persons, which is a very low monthly number, while the labor force grew by 83,000 participants.

The Fed and markets may not like it, but the economy and labor markets are clearly in a much healthier place than they were several months ago. Who was hiring? Local governments hired 55,000 individuals and the leisure and hospitality industry tacked on 70,000 new jobs. That in itself could be a sign of an expected increase in consumer spending.

Key Data

The U-3 Unemployment Rate or the “underemployment rate,” which is also drawn from the Household Survey, moved lower in May from 8.2% to 8.1%. The Participation Rate held steady at 61.8% and has now held firm at its lowest level since September 2021. The Employment to Population Ratio similarly dropped from 59.2% to 59.1%. That’s a little misleading.

Low participation is due to some increased retirement among the older crew. Participation among 25-to-54-year-olds stands at 83.9%. The 25-year high participation level for that demographic is 84%, so for core workers, by age, participation is high by recent historical standards.

The number of individuals working part-time for economic reasons decreased by 137,000 persons in May while the number of individuals working part-time for non-economic reasons increased by 147,000 persons. That’s just 10,000 more part-time workers with job creation (from the same survey) of 149,000 positions.

This implies a significant increase in full-time employment of as many as 139,000 full-time positions or a net 255,000 full-time jobs if one uses non-farm payrolls. It’s been quite a while, many years even, since U.S. employers started moving part-timers to full-time status in the kinds of numbers that this report implies.

Additionally, the average workweek for full-timers, which is also a measure of labor market demand, held firm at 34.3 but with more full-timers in the system, so this shows an increase in such demand. It wasn’t all gummy bears and rainbows. Wage growth for those employed did slow from 3.6% on a year over year basis in April to 3.4% in May.

Demographics

The unemployment rate along gender, ethnic background and education:

• Adult Men stayed put at 4.0%
• Adult Women decreased from 3.9% to 3.8%
• Teenagers increased from 14.4% to 14.7%
• White increased from 3.7% to 3.8%
• Black or African American decreased from 7.3% to 6.6%
• Asian increased from 3.3% to 3.8%
• Hispanic or Latino stayed put at 5.0%
• High School Dropouts decreased from 6.4% to 6.0%
• High School Graduates decreased from 4.7% to 4.4%
• Some College/Associate Degrees increased from 3.2% to 3.6%
• Bachelor’s Degrees and more decreased from 2.8% to 2.7%

Markets and Policy

The truth is that this is a much stronger labor market than those who do vote on policy at the Fed’s FOMC thought they were going to have to be dealing with as 2026 wore on. This is even after tackling the government shutdowns, tariffs and the war with Iran. There’s a chance that if all of these ducks can line up in a row, that this economy will really heat up. Especially with the improved tax regime that had been enacted for this fiscal calendar year.

Obviously, though I don’t see a reason to raise rates at this point as the inflation that has been produced has been the result of a supply shock, that’s not how PhD economists with far less real-life experience are going to see it. With Kevin Warsh at the helm, who does seem to have a pragmatic understanding of economic conditions, a rate hike may not be coming quickly, but there is no way a rate cut is coming either. Especially with former Chair Jerome Powell, who has always had trouble interpreting the economy, still voting and still exerting influence.

According to futures markets trading in Chicago, there is no net rate cut or increase priced in at any point on the calendar. There is now a 70% probability for a 25 basis-point rate hike priced in for December 2026. That’s been moved up from a 65% chance for such a move in March 2027 as recently as Friday morning. There is now a second 25 basis-point rate hike priced in for June 2027 (56% probability). As of Friday morning there was no second-rate hike anywhere on the calendar.

At the time of publication, Guilfoyle had no positions in any securities mentioned.