May Employment Report: Revival in the Labor Market

Nonfarm payrolls rose 172k in May, noticeably stronger than the expectation of 110k shown in the Action Economics survey. Moreover, results for the prior two months combined were revised higher by 93k. The gain in May does not appear to be an isolated event, as payrolls have now posted firm showings for three consecutive months (average advance of 188k). This performance represents a marked improvement from late 2025, when payrolls were showing essentially no net gain.

A good portion of the job growth in May occurred in the local government sector (55k), but the health care and leisure & hospitality sectors also were strong. The construction and manufacturing industries (highly cyclical areas) were both in the plus column. Soft spots were limited, with only the financial services sector showing notable job cuts (-22k).

The improvement in the labor market also was evident in the payroll diffusion index. This measure shows the share of industries expanding payrolls plus one-half the share holding payrolls steady; a reading of 50 separates net expansion from contraction. This index was in sub-50 territory during much of 2024–25, but it moved into 50+ territory in March and climbed a bit higher in April and May (53.8 in May).

The unemployment rate was reported as steady at 4.3%, but a more precise calculation shows a slight improvement (4.296% versus 4.337% in April). Moreover, the dip was meaningful, as it was driven by employment growth as measured by the household survey (149k) that exceeded the increase in the size of the labor force (83k). The broad unemployment rate (the so-called U-6 measure) fell 0.1 percentage point to 8.1%. Both additional components of the broad unemployment rate contributed to the improvement (the number of individuals working part time involuntarily and the number of individuals who would like a job but are not actively searching).

Average hourly earnings rose 0.3% in May, a touch firmer than readings of 0.2% in the prior two months. Although earnings posted a solid advance in May, the increase was lighter than the 0.4% gain in May of last year, and thus the year-over-year change eased to 3.4% from 3.6% in April. Year-over-year changes in average hourly earnings had been larger than those in the consumer price index, indicating that many workers were registering gains in purchasing power. However, with the pickup in inflation, individuals fell behind in April, and the CPI for May (to be published on June 10) could show additional slippage in purchasing power.

The employment and earnings data are collected from surveys taken each month during the week containing the 12th day of the month. The labor market data are contained in Haver's USECON database. Detailed figures are in the EMPL and LABOR databases. The expectations figures are in the AS1REPNA database.