By Lucia Mutikani
WASHINGTON (Reuters) -U.S. job growth likely slowed considerably in May as businesses struggled with headwinds from tariff uncertainty, but probably not enough for a cautious Federal Reserve to resume cutting interest rates anytime soon.
The Labor Department’s closely watched employment report on Friday is also expected to show the unemployment rate holding steady at 4.2% for the third straight month and solid wage growth, which should keep the economy afloat for now.
Nonetheless, the economy’s prospects are dimming and economists say President Donald Trump’s flip-flopping on tariffs has hampered businesses’ ability to plan ahead.
They expected May to mark the start of slower job gains. Opposition to Trump’s tax-cut and spending bill from hardline conservative Republicans in the U.S. Senate and billionaire Elon Musk added another layer of uncertainty for businesses.
“The economy is caught in a rising temperature pressure cooker situation,” said Brian Bethune, an economics professor at Boston College. “Tariff policies are changing daily, planning in that environment is clearly not conducive to any hiring.”
Nonfarm payrolls likely increased by 130,000 jobs last month after rising 177,000 in April, a Reuters survey of economists showed. That would be below the three-month average of 155,000, but above the roughly 100,000 jobs per month that economists say are needed to keep up with growth in the working age population.
Estimates ranged from 75,000-190,000 jobs added. Much of the job growth this year reflects worker hoarding by businesses.
“Businesses have learned the lesson of past recessions that if they are overly proactive in laying off staff or pulling back on investment into economic softness, it can be hard to get those people back or to resume investment when the economy recovers,” said Andrew Husby, a senior economist at BNP Paribas Securities. “That dynamic remains in full effect, and we see a low-hiring, low-layoff environment continuing this spring.”
Economists believe this state of affairs could keep the U.S. central bank on the sidelines until the end of the year. Financial markets expect the Fed will keep its benchmark overnight interest rate unchanged in the 4.25%-4.50% range later this month, before resuming policy easing in September.
“Yet, with both large and small businesses indicating that they plan to hold onto their workers and ride out the tariff storm, only a modest weakening in the jobs market is likely, further reducing the urgency for Fed support,” said Seema Shah, chief global strategist at Principal Asset Management. “We expect the Fed to wait until the fourth quarter before it reduces policy rates.”
TARIFF DRAG
The anticipated moderation in job growth last month would be payback after front-loading of imported goods boosted payrolls in the transportation and warehousing industries in April.
More jobs were likely created in the healthcare sector, but a sharp reduction in tourist travel because of trade tensions and Trump’s often expressed desire to make Canada the 51st of the United States and acquire Greenland, could hamper leisure and hospitality employment.
Manufacturing payrolls probably remained weak as factories grappled with duties on raw materials, including motor vehicle parts. Construction employment could soon come under pressure from 50% tariffs on steel and aluminum.
May was probably another month of moderate federal government job losses. While mass layoffs of public workers have grabbed headlines, a federal judge has blocked the firings.
Reinstated workers who have been put on paid leave are counted as employed. The same applies to those who have accepted buyout offers.
With the White House revoking the temporary legal status of hundreds of thousands of immigrants, fewer than 100,000 jobs per month would likely be needed to keep the jobless rate stable. The shrinking labor pool could push down the unemployment rate and boost wage growth, economists say.
Average hourly earnings are forecast to have increased 0.3% after gaining 0.2% in April. In the 12 months through May, wages are estimated to have risen 3.7% after advancing 3.8% in April, more than sufficient to support consumer spending.
There has so far been a limited impact on the labor market from the immigration crackdown. Goldman Sachs economist Elsie Peng said their estimate of recent immigrants’ labor force participation rate since December 2024 had increased to 67% from 65%, with their unemployment rate declining to 7% from 10%.
“However, the response rate of recent immigrants to the household survey has also declined somewhat over this period, raising concerns that the survey may have missed many unauthorized immigrants who are scared to go to work amid the intense immigration crackdown,” said Peng.
“Even under the extreme assumption that this decline fully reflects withdrawal of these immigrants from the labor force, we estimate that these trends would together imply only a modest hit, -4%, to employment of recent immigrants.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama)
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