Job Growth Surges Past Expectations in May, Bolstering Odds of Fed Rate Hike

Exceeding expectations, the U.S. economy added 172,000 new jobs in May, while the national unemployment rate remained locked at 4.3% for the third consecutive month.

The latest report from the Bureau of Labor Statistics released Friday showed that nonfarm payroll growth last month far surpassed preliminary forecasts ranging from 85,000 to 110,000.

Another robust jobs readout bolsters the case for Federal Reserve hawks advocating an interest rate hike later this year as a way to rein in inflation.

The employment sectors that saw the biggest gains in hiring in May included leisure and hospitality (+70,000), local government (+55,000), and healthcare (+35,000), as job creation in financial services softened (-22,000), driven by insurance carriers and commercial banking.

Employment levels were mostly unchanged over the month in transportation and warehousing, construction, manufacturing, trade, information, professional and business services.

“We remain in a low-hire, low-fire labor market, but one that looks increasingly stable,” says Realtor.com® senior economist Jake Krimmel.

Notably, the May jobs report reflects significant revisions to the two previous months: March was revised up by 29,000 payrolls, +185,000 to +214,000, meaning it was better than initially thought, while April was revised up by 64,000 jobs, from +115,000 to +179,000.

Across the two months, employment was 93,000 higher than previously reported.

Jobs report bolsters case for a rate hike

For the Federal Reserve, now headed by new Chair Kevin Warsh, and for the broader economy, Krimmel says an improving labor market is good news in and of itself—but perhaps more importantly because it means one fewer crisis to resolve.

“Labor stability, and upside surprise job growth like today, is a much-needed counterweight to the price instability and upside risk that has dominated the macro outlook since the Iran War began,” says the economist. “It lets the Fed focus squarely on inflation, which is where its attention belongs.”

Federal Reserve Governor Christopher Waller, who was calling for a Federal Funds rate cut just a few months ago, recently conceded that policy risks have changed.

Earlier this week, Dallas Federal Reserve President Lorie Logan said she was “increasingly concerned” that an interest rate hike was needed to restore price stability.

With the labor outlook improving and the inflation picture deteriorating, Krimmel contends that the next move on Fed rates is more likely up than down.

Financial markets now put the probability of the Fed increasing interest 25 basis points above their current 3.5%-3.75% range by the end of the year at roughly 43%, according to CME FedWatch.

“In that environment, labor market movements are unlikely to be the main driver for changes in mortgage rates,” says the economist. “The 10-year yield and mortgage rates will continue to be more sensitive to geopolitics, inflation expectations, and war-driven uncertainty than to job growth and unemployment statistics right now.”

What does this mean for the housing market?

For consumers and the housing market, four months of solid job growth offer welcome stability, even as long-term questions loom over how AI might reshape the labor market in the next few years.

However, Krimmel notes that the statistic that matters most for households and housing now is not the headline jobs figure: it is the race between earnings growth and inflation.

Average hourly earnings rose 3.4% year over year in May, slipping from 3.6% last month, and with Consumer Price Index (CPI) expected around 4.2% when it lands next week, real wages remain negative and are moving in the wrong direction. 

So far this spring, housing demand has stayed resilient, with annual gains in pending listings and contract signings. Sellers are being more realistic and strategic at listing time, and asking prices have fallen for seven straight months.

Yet, despite some buyer-friendly momentum, elevated mortgage rates stuck in the mid-6% range, inflation, and overall uncertainty continue to challenge shoppers.

“For the housing market to keep treading water, we need the labor market to hold or, ideally, to show signs of a real summer pickup,” concludes Krimmel.