By Lucia Mutikani
WASHINGTON, June 5 (Reuters) – The U.S. economy posted a third straight month of strong job gains in May, confirming the labor market was gaining traction after stumbling last year and giving the Federal Reserve more room to keep interest rates unchanged amid rising inflation due to the war in the Middle East.
The closely watched employment report from the Labor Department on Friday painted an upbeat picture of the job market. The economy added 93,000 more jobs in March and April than previously estimated and the unemployment rate held at 4.3% for a third consecutive month.
While financial markets boosted the chances of an interest rate hike in December, economists said the bar remains high for monetary policy tightening, pointing to moderate wage growth. But they acknowledged the report gave ammunition to Fed officials pushing for the removal of the central bank’s easing bias. The policy-setting Federal Open Market Committee will release its next statement on June 17.
Economists say fiscal stimulus, in the form of tax and import tariff refunds, has cushioned the impact of the U.S.-backed war with Iran, which has stoked inflation through a surge in oil prices. Corporate profits have increased since the second quarter of 2025, allowing businesses to refrain from large-scale layoffs. Economists, however, warned of risks to the labor market if the war persists.
“It has become increasingly clear that hiring has picked up from the sluggish pace seen for much of 2025, but we do not believe the labor market has shifted back into overheating mode,” said Tom Porcelli, chief economist at Wells Fargo. “That said, the wind is likely to remain beneath the wings of the hawks on the FOMC for now.”
Nonfarm payrolls increased by 172,000 jobs last month after rising by an upwardly revised 179,000 in April, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast payrolls would increase by 85,000 jobs after a previously reported rise of 115,000 in April.
Estimates for job growth ranged from 50,000 to 125,000. The payrolls count for March was revised up by 29,000 jobs to 214,000. Employment gains have now averaged 188,000 jobs per month over the past three months, nearly triple the comparable figure for the same period in 2025.
Private sector employment increased by 120,000 jobs in May, with total government payrolls rising by 52,000, the most in nearly two years.
Economists estimated the economy needs to create between zero and 50,000 jobs per month to keep up with growth in the working-age population. The so-called break-even rate has dropped because of an immigration crackdown that has reduced the labor force, limiting the rise in the unemployment rate.
The strength in job growth was mirrored by the household survey from which the unemployment rate is calculated. Household employment increased by 149,000, more than absorbing the 83,000 people who entered the labor force.
Still, the labor force participation rate was unchanged at a 4-1/2-year low of 61.8%. The labor force is down by about 1.4 million since December.
The labor market had been hampered by uncertainty over the Trump administration’s implementation last year of sweeping tariffs, which made businesses cautious about boosting hiring. Though businesses are hiring, much of the improvement in job growth is likely due to historically low layoffs.
The U.S. Supreme Court in February struck down the tariffs, and some businesses have filed for refunds. Large income tax refunds have allowed consumers to keep spending, though upper-income households are doing most of the heavy lifting.
The run of strong employment gains suggests the labor market could be breaking out of its “slow-hire, slow-fire” equilibrium. Interest rate traders on Friday saw about a 70% chance that the Fed would raise rates in December, compared with about a 50% probability before the release of the data, according to CME Group’s FedWatch tool. The Fed’s benchmark overnight interest rate is currently in the 3.50%-3.75% range.
The dollar gained versus a basket of currencies. U.S. Treasury yields largely rose, with the interest-rate-sensitive two-year note hitting its highest level since February 2025. U.S. stocks were trading sharply lower.
ANNUAL WAGE GROWTH SLOWS
Job gains broadened out in May, with the leisure and hospitality sector adding 70,000 positions, well above the average monthly gain of 14,000 over the past 12 months. Payrolls at restaurants and bars rose by 48,000 jobs. These establishments could be hiring in preparation for the FIFA World Cup soccer tournament, which is being partly hosted by the U.S.
Local government employment increased by 55,000 jobs.
Federal government payrolls rose by 1,000, but employment was down about 336,000 from its peak in October 2024 after the White House last year embarked on an unprecedented campaign to shrink the federal workforce.
The healthcare sector added 35,000 jobs, most of them in ambulatory services. Construction employment increased by 17,000 jobs, concentrated among specialty trade contractors. There were modest job gains in the manufacturing, professional and business services, mining and logging, and oil and gas extraction sectors.
But employment tied to financial activities dropped by 22,000 jobs and is down by 107,000 since a recent peak in May 2025, reflecting losses for insurance carriers and related activities as well as commercial banking. Air transportation payrolls fell by 8,700 jobs, likely linked to the collapse a month ago of Spirit Airlines. Retailers shed jobs as did businesses in the information and wholesale trade industries.
The share of industries reporting employment growth rose to a six-month high of 54.4% from 54.0% in April. The average workweek was unchanged at 34.3 hours. Annual wage growth slowed to 3.4% from 3.6% in April. While wage growth has not been the primary driver of the recent inflation, the rising cost of living is eroding household purchasing power, which could undercut consumer spending.
Household disposable income after adjusting for inflation has dropped for three straight months and the saving rate is at a four-year low as consumers seek to fund spending.
There were some blemishes in the employment report. The number of people unemployed for 27 weeks and more increased by 155,000 to 1.988 million, the highest level since December 2021.
The median duration of unemployment jumped to 11.6 weeks, the longest since November 2021, from 11.0 weeks in April, an indication that out-of-work people were struggling to land new positions.
“What’s notable is that unemployment is increasingly concentrated among younger, more educated workers who are staying in the labor force, and that’s one reason it may be harder for the (unemployment) rate to move meaningfully lower from here,” said Adam Schickling, senior economist at Vanguard.
(Reporting by Lucia Mutikani; Editing by Andrea Ricci, Chizu Nomiyama and Paul Simao)
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