The effect of the job market on the economy

According to the U.S. Bureau of Labor Statistics, the U.S. economy added 139,000 jobs in May, outpacing economists’ expectations. ¹ While job growth is slowing from previous years, the data offer an encouraging sign that consumers remain in a healthy position to contribute to economic growth. However, the 2025 monthly average was tempered by downward revisions to March and April’s job count, reducing total 2025 job gains by 95,000. ¹

“Once again, this report shows we’re still keeping up with population growth, which requires at least 100,000 payroll jobs added per month,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management Group. “Payroll growth is moderating to a more natural level, especially if you anticipate slower labor force growth over time.”

Consistent with recent trends, healthcare remains the most productive segment of the employment market. Health care added over 62,000 positions in May, up from 44,000 jobs added in April. Leisure and hospitality industries added another 48,000 jobs. “It’s not surprising that most of the job gains are in these two areas,” says Tom Hainlin, national investment strategist for U.S. Bank Asset Management Group. “This is where many of the job openings can be found.” By contrast, following a series of sizable layoffs, federal government employment declined. Changes were modest in most other employment categories. ¹

Unemployment remains unchanged

A year earlier, in May 2024, the unemployment rate climbed to 4.0% for the first time since early 2022. Since that time, the rate has remained relatively stable. May 2025 marked the third consecutive month with an unemployment rate of 4.2%. ¹

Another sign of the job market’s health is that job openings remain relatively high, at 7.4 million. ² “This is a signal that companies aren’t slowing down in terms of hiring intentions,” says Haworth. “If companies were more hesitant to add workers, you’d likely see the number of job openings decline.” According to the latest Employment Situation Summary from the U.S. Bureau of Labor Statistics, approximately six million Americans are looking for work, which is slightly fewer than the number of available workers. ¹

Another closely watched statistic is the labor force participation rate. In May, the rate, which had previously held relatively steady, decreased by 0.2% to 62.4%. ¹ This number is down from a recent high of 62.8%, reached in November 2023.3 ³

An early signal to watch – weekly jobless claims

The closest thing to a “real-time” labor market measure is the weekly initial jobless claims report. This number often fluctuates from week-to-week. In late May and early June, initial claims stood at 248,000 in two consecutive weeks, the highest level in seven months. Over the previous year, initial weekly jobless claims averaged 227,000. ⁴ “One week’s numbers represent a data point, not a trend,” says Haworth. “If you look at long-term history, sub-300,000 initial weekly jobless claims are considered a fairly healthy level for the economy.”

Wage gains remain healthy

Along with the number of jobs created, another critical data point is the pace of wage gains. For the 12 months ending in May 2025, average hourly earnings rose 3.9%. This figure has remained relatively steady in 2025. ¹

Average hourly wage growth remains well above levels seen between 2014 and 2019. Wage gains jumped considerably after 2020’s onset of the COVID-19 pandemic. ³

“The fact that hourly wage gains remain strong and are not deteriorating might be a sign of ongoing labor market tightness,” says Haworth.

Federal Reserve reaction

Investors closely track job data as an important economic indicator and a potential signal about Federal Reserve (Fed) monetary policy. A question investors raise is at what point the Fed will seek to lower interest rates. The Fed’s primary vehicle to manage interest rate policy is the federal funds target rate. This short-term rate guides banks for overnight lending, and influences consumer financing rates on mortgages, automobile loans and credit cards. The policy rate and investor expectations about its future path also have a strong influence over bond yields. After maintaining the Fed funds rate at 5.25% to 5.50% for more than a year, the Fed began cutting rates in September 2024. By year’s end, it had lowered its target rate to 4.25% to 4.50%.

So far in 2025, the Fed has left interest rates unchanged. The latest jobs data is unlikely to convince Fed policymakers to initiate rate cuts in the near term. “When the Fed began cutting rates last September, initial weekly jobless claims and the unemployment rate were on the rise,” says Haworth. “For the labor market to catalyze the Fed to cut rates again, we’d have to see more deterioration than is apparent today.”

What to expect going forward

A degree of economic uncertainty continues as U.S. trade policy evolves, mainly related to higher tariffs. Whether this results in labor market challenges remains to be seen. Investors are also monitoring the effects of tighter immigration policies proposed by the Trump administration. “People subject to deportation, in many cases, came to America to work, so if they leave, other workers will need to step into those jobs,” says Haworth. He notes the construction industry is a key area where the labor market may tighten in the months ahead. Inflation considerations also play an important role in Federal Reserve decisions. While recent reports indicate moderating inflation, many economists expect higher inflation in coming months as a result of higher tariffs.

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