What’s Wrong with May’s Jobs Report?
Amid all the jubilation over the equity market’s 1.0% daily jump in response to May’s slightly bigger than expected increase by payrolls, Treasury bond prices sank. The drop in Treasury bond prices lifted the 10-year Treasury yield up by 12 basis points to 4.51%, which favors a nearly 6.9% FHLMC 30-year mortgage rate.
May jobs report sinks prices of Treasury bonds and housing-related stocks …
By lifting the 30-year mortgage yield’s benchmark Treasury yield, the Treasury bond market’s reaction to May’s employment report worsened prospects for the home sales and the sales of other items showing a high positive correlation with home sales.
Friday’s outsized jump by Treasury bond yields prompted daily setbacks of -1.4% for the S&P’s index of homebuilder share prices, -0.7% for the S&P’s index of home improvement share prices, and -0.6% for PHLX’s index of housing-sector stock prices. Partly because of elevated mortgage yields, housing remains unaffordable for first-time homebuyers.
Real estate developers need lower Treasury yields badly …
Moreover, real estate developers are finding it difficult and costly to refinance commercial mortgages and construction loans at current Treasury yields. New construction may be put on hold until benchmark Treasury yields sink. A lower supply of rental housing than otherwise may slow, if not reverse, the latest deceleration by the CPI’s rental cost component. Burdensome rents lower the savings that otherwise might fund the downpayment for a newly purchased home.
No guarantee Fed rate cuts will lower longer term mortgage yields …
And Fed rate cuts may not quickly reduce mortgage yields. Until more there is convincing evidence of a further deceleration by price inflation, Fed rate cuts offer no assurance of lower Treasury bond yields. After all, in conjunction with a percentage point cutting of the federal funds rate from September 2024’s 5.38% to the current 4.38%, the 10-year Treasury yield rose from roughly 3.7% just prior to September’s initial Fed rate cut to a recent 4.51%.
Futures barely sense two Fed rate cuts by end of 2025 …
Rightly or wrongly, the May employment report improved the US’ economic outlook by enough to lift the one- and two-year US Treasury yields up to 4.144% and 4.045%, respectively. The latest one- and two-year Treasury yields suggest that the credit market expects the one-year Treasury yield to dip from its latest 4.14% to 3.95% during the 12-months-ended early June 2027. Thus, the market expects no more than two Fed rate cuts going forward. Two rate cuts imply the federal funds rater dips from a now 4.38% to 3.88%.
As inferred from the CME Group’s FedWatch Tool, the implied probability of fed funds ending 2025 no higher than 3.88% was recently 61%, which isn’t that much different from 50-50.
Markets overstated upbeat economic implications of May’s jobs report …
I sense financial markets extrapolated too much near-term economic vigor from May’s employment report, mostly because May’s increase by payrolls was narrowly focused.
The longer consumers and businesses wait to see the degree to which higher tariffs increase prices and, thereby, reduce unit sales, the flatter will be domestic spending.
Despite topping the expected gain of 125,000 jobs, the 139,000 jobs added to May payrolls left much to be desired. The glaring deficiency of May’s employment report was the incredibly lopsided distribution of jobs growth. Approximately 126,000, or 91%, of the 139,000 jobs added in May came from a handful of job categories, namely, healthcare’s 62,200 jobs, social assistance’s 16,100 jobs, and leisure and hospitality’s 48,000 jobs.
Private-sector jobs up by 14K ex healthcare, social work, leisure & hospitality …
Outside of May’s just cited job increases, the remainder of private-sector payrolls rose by merely 14,000 jobs in May. The dearth of private sector jobs growth excluding healthcare, social assistance, leisure, and hospitality was consistent with what I was told by a former professor from one of the US’ top undergraduate business programs. Despite the sterling reputation of the college’s business program, the class of 2025 was finding it hard to secure suitable employment. Uncertainty surrounding the impact of tariffs compels many businesses to delay hiring decisions.
The lopsided distribution of jobs matters from the perspective of average weekly earnings. For example, the $1,220 average weekly earnings for private-sector workers during the 12-months-ended May 2025 consisted of averages of $1,149 for private education and healthcare, $571 for leisure and hospitality, and a much greater $1,363 for all other private-sector jobs.
Healthcare and social assistance supply 49% of jobs created since May 2024 …
Jobs growth during the 12 months ended May 2025 was dominated by health care and social assistance. The average monthly increase for the number of health care and social assistance jobs was 71,000 during the 12-months-ended May 2025, which practically matched the accompanying 73,000 jobs per month created throughout the rest of the economy.
In terms of year over year growth rates, May 2025’s payrolls were up by 3.8% for healthcare and social assistance. By contrast all other jobs showed a yearly uptick of merely 0.6% annually, which lagged May’s 1.1% yearly rise for all private and public sector jobs.
The increased importance of healthcare and social assistance to the US labor market cannot be understated. Although health care and social assistance account for only 14% of all outstanding jobs in the US economy, health care and social assistance supplied 49% of the jobs added to payrolls during the 12-months-ended May 2025.
Government funds many private-sector healthcare and social work jobs …
Worth noting is the government’s outsized funding support of healthcare and social assistance jobs. For example, during the year ended March 2025, the $2.05 trillion sum of Medicare and Medicaid payments approximated 61% of the $3.37 trillion of total consumer spending on healthcare. No wonder Medicaid spending has been a contentious issue throughout Congressional negotiations over the federal budget.
Making America healthy again through the federal taxation of harmful products would help to rein in federal spending on healthcare.
May’s social assistance jobs soar higher by 6.6% year-on-year …
May’s number of social assistance jobs grew by 320,000 from May 2024, or 6.6% year-on-year. At the same time, 534,000 jobs were added to health care payrolls for an annual increase of 3.0%.
Healthcare’s 11% of all outstanding jobs accounted for 31% of the number of jobs added during the year ended May. Social assistance’s scant 3% of all outstanding jobs supplied 18% of all jobs created during the year ended May.
For 2025-to-date, federal jobs shrink by -56K, as state & local governments add 89K jobs …
The Department of Government Efficiency (DOGE) has had some success at paring US government payrolls. For May, federal government payrolls shrank by -22,000 jobs, which left US government jobs down by -56,000 for 2025-to-date.
Since May 2024, federal payrolls contracted by -42,000 jobs for a year-on-year drop of -1.4%. However, all government jobs managed to grow by 270,000, or 1.2%, since May 2024 because of the addition of 312,000 jobs to state and local government payrolls for a yearly gain of 1.5%.
May’s monthly gain of 21,000 state and local government jobs limited May’s loss of all government jobs to -1,000. For 2025-to-date, all government jobs rose by 33,000 thanks to the accompanying addition of 89,000 state and local government jobs.