US payrolls surge 172,000 in May, nearly doubling forecasts

The strongest monthly hiring beat in over a year pushes the Fed further from rate cuts as inflation risks persist.

A stronger-than-expected US labor market report for May calmed recession fears but rattled financial markets, with Treasury yields surging and the dollar climbing as traders pushed rate-cut bets further into 2026.

"The labor market is running too hot for the Fed to consider easing anytime soon, especially with energy costs rising," said James Knightley, chief international economist at ING. "This report keeps a rate cut off the table through at least September."

Nonfarm payrolls rose by 172,000 last month, the Bureau of Labor Statistics reported Friday, more than double the consensus estimate of 88,000. The unemployment rate held steady at 4.3%. Private-sector employers added 120,000 jobs, also beating expectations. The 2-year Treasury yield jumped 12 basis points to 4.18% immediately after the release, while the Bloomberg Dollar Spot Index climbed 0.4%. S&P 500 futures pared gains and Nasdaq 100 contracts pointed to a lower open as rate-sensitive technology stocks sold off.

The data complicates the Fed's path after it reduced rates by three-quarters of a percentage point in late 2025 and has since held steady. Overnight-indexed swaps now price less than 50 basis points of cumulative cuts through year-end, down from 75 basis points before the report. The next Fed decision is June 17-18.

The May reading marks the second consecutive month of above-consensus hiring after April's revised gain of 179,000. Payroll processor ADP reported Wednesday that private employers added 122,000 jobs in May, the strongest pace since January, with hiring more broadly distributed across industries.

The resilience comes despite headwinds from the Iran-Israel conflict, which has pushed energy prices sharply higher in recent months. Consumer sentiment surveys show Americans remain concerned about inflation and gasoline prices, though corporate earnings tell a more nuanced story. With more than 90% of S&P 500 companies having reported first-quarter results, earnings per share are running about 29% higher than a year earlier, according to LSEG data.

Gross domestic product expanded at a 1.6% annualized pace in the first quarter, while the Atlanta Fed's GDPNow tracker estimates growth of around 3% for the second quarter — suggesting the economy is accelerating rather than slowing.

The rate-cut calculus

For the Fed, the data reinforces a wait-and-see posture that policymakers have maintained since the last reduction in late 2025. The central bank has repeatedly emphasized the need for additional data before making further moves, and Friday's report gives it little reason to accelerate the timeline.

The last time payrolls surprised as far above consensus was in early 2025, when a 200,000-plus reading preceded a three-month stretch during which the Fed held rates steady while inflation data remained sticky. A similar pattern may now unfold, with the labor market's strength giving policymakers cover to keep rates restrictive even as growth concerns linger.

The divergence in consumer behavior adds another layer. Discount retailer Dollar General said many shoppers remain financially stretched and are cutting back on everyday purchases, while Macy's reported continued demand for higher-priced merchandise among wealthier consumers. That bifurcation suggests the economy's resilience is increasingly driven by higher-income households, a dynamic that could narrow if the labor market eventually softens.

This article is for informational purposes only and does not constitute investment advice.