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All eyes will be on the May jobs report when it comes out Friday morning as investors look for clues about the labor market's health in the face of higher interest rates, stubborn inflation and recession fears.
The Labor Department's high-stakes May payroll report is projected to show that hiring increased by 190,000 last month and that the unemployment rate inched higher to 3.5%, according to a median estimate by Refinitiv economists.
That would mark a drop from the 253,000 gain in April and the 290,000 monthly average recorded over the previous six months. However, it is slightly above the average pre-pandemic monthly increase.
"In the last few months, the job market has continued to defy gravity, adding a steady clip of jobs and holding unemployment at historically low levels despite a backdrop of rising interest rates, banking turmoil, tech layoffs and debt ceiling negotiations," said Daniel Zhao, senior economist Glassdoor. "After a healthy April jobs report, May is likely to repeat with an equally strong performance."
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The Federal Reserve is closely watching the report for evidence that the labor market is finally softening after months of surprisingly healthy job gains as policymakers try to wrestle inflation under control. Although the consumer price index has cooled from a peak of 9.1% in June 2022, it remains about three times higher than the pre-pandemic average despite 10 consecutive interest-rate hikes.
Policymakers have signaled that they may skip another rate hike at their meeting later in June as they examine how tighter monetary policy is affecting the economy. However, some officials have hinted they are open to raising rates for the 11th straight time.
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"The May jobs report will take on heightened importance given the Fed’s extreme data-dependent approach and the growing divide among Fed policymakers over whether to pause their rate-hiking campaign in June," said Gregory Daco, EY chief economist.
Hotter-than-expected job and wage data on Friday could be a worrisome sign for the U.S. central bank.
The Labor Department's May payroll report is projected to show that hiring increased by 190,000 last month and that the unemployment rate inched higher to 3.5%. (Michael M. Santiago/Getty Images / Getty Images)
"Overall, the May jobs report should still argue in favor of a Fed pause at the upcoming June FOMC (Federal Open Market Committee) meeting," Daco said. "Still, hawkish Fed commentary and excessive data dependence mean that a hotter-than-expected jobs report could push the small majority of policymakers in favor of a ‘hawkish pause’ to join those favoring another rate hike."
The labor market has remained historically tight over the past year, defying economists' expectations for a slowdown.
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A separate report released Wednesday showed that job openings unexpectedly surged to 10.1 million in April, the highest level in three months. Before the COVID-19 pandemic began in early 2020, the highest on record was 7.6 million. There are still roughly 1.6 jobs per unemployed American.
The report also pointed to a decline in layoffs and discharges, indicating that employers are holding onto their workers in the competitive labor market.