The US economy is being rocked by some major shocks emanating from the Trump administration: DOGE cuts of federal workers and research grants, higher tariffs (which also bounce around from day to day), actions against immigrants (even legal ones), bond market fears of rising deficits from the One Big Beautiful Bill…
But how does all of this impact the job market?
On the surface, the market seems pretty steady. According to the new Bureau of Labor Statistics jobs report for May, payrolls grew at a rate of 139,000 – a bit down from earlier months but still pretty solid. The unemployment rate also remained at 4.2 percent.
But, beneath the headline numbers, there are signs in the jobs data of a weakening market – and one that Trump’s actions are affecting in modest but meaningful ways.
On the payroll side, almost all of the job growth occurred in two sectors: health care and leisure/hospitality, which together accounted for 80 percent of all new jobs. Employment modestly declined in professional services (especially the scientific research sector), retail trade and federal employment; indeed, federal jobs are down by 59,000 since February, and more such declines are coming as more workers who are now on administrative leave or severance pay show up as unemployed.
Importantly, the large increases in overall payrolls of March and April were revised down quite substantially – from 185,000 to 128,000 in March, and from 177,000 to 147,000 in April. The revised numbers are still fairly solid, but simply not as strong or resilient as we had earlier thought.
In the household survey: despite the steady unemployment rate, the number of workers employed dropped by 700,000 – driven primarily by a fairly sharp drop in labor force participation. The number of job losers, which had risen by 140,000 in April, stayed at the same (higher) number in May.
How shall we interpret these numbers? The Trump administration’s actions have created a growing number of job losers, concentrated in key sectors like federal employment and scientific research. Weakening consumer sentiment has modestly reduced retail employment for two months in a row, while payrolls in most other sectors are in a holding pattern. The amount of uncertainty facing employers is huge, and most prefer to wait and see what happens before hiring more workers or laying them off in large numbers.
Where does the economy go from here? Whether tariffs remain higher (or rise, as they did this week on steel and aluminum), creating more inflation and less consumer spending, depends on whether Trump can cut deals with other countries – even if the deals change exports and imports only marginally. If Congress passes and Trump signs his huge tax cut bill, there may be a bump up in consumer and business spending but also rising deficits and debt, which will likely raise interest rates and curtail new investment. And, if foreign savers grow more anxious about our rising federal debt loads, their willingness to buy US treasury bonds could decline over time, leading to further interest rate increases. On the other hand, if a recession looms, interest rates could decline as bond traders expect rate cuts.
The Federal Reserve bank indicated this week that it remains in a “wait and see” mode on interest rates. Employers appear to be reacting similarly to the huge uncertainty in economic policy that the Trump administration is creating. Going forward, each month’s new data will clarify the picture, but it may remain quite blurry for months to come.
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