Was May's Non-Farm Payrolls Overstated? Economist: The US Labour Market Is Actually Much Weaker!

Last Friday, Eastern Time, the latest non-farm payrolls report released by the US Bureau of Labor Statistics brought relief to the market.

The report showed that the seasonally adjusted non-farm payrolls in the US for May recorded 139,000 new jobs, the lowest since February but still higher than the market expectation of 130,000. Meanwhile, the US unemployment rate remained at 4.2% for the third consecutive month, easing concerns that the labour market was beginning to slow down significantly.

However, Samuel Tombs, chief US economist at Pantheon Macroeconomics, warned that these figures might not tell the whole story. He believes that the US labour market is grappling with weak hiring and an accelerating trend of downward revisions.

He cited the March non-farm payrolls data as an example, where the initial figure of 224,000 new jobs was nearly halved to 120,000 in subsequent revisions. Therefore, the May figures may also have been overstated.

Tombs wrote in his latest report: "We expect that in the third estimate, to be released in early August, the employment figure for May will be revised down to around 100,000. "

As per usual practice, the US Department of Labor releases the initial estimate, followed by a revision the next month, and the final estimate the month after that.

He pointed out that since January 2023, the initial estimate of monthly data has been revised down by an average of 30,000 compared to the third estimate, possibly due to delayed payroll data submissions from small businesses. Small companies are often hit hardest by high interest rates and tariff costs.

"In this economic downturn, small businesses are truly like canaries in a coal mine. They lack the financial resources to handle many of the upfront costs associated with tariffs. They still face very high borrowing costs, so they are extremely cautious in hiring and capital expenditures," he added.

Tombs believes that the retail, wholesale, transportation, and logistics sectors will continue to weaken, and he projects that employment in these sectors will decline by 50,000 by the end of this year, due to the fading "front-loading effect" of tariffs, with many businesses and consumers rushing to make purchases before tariff-related price increases.

In addition to data revisions, hiring also appears to be slowing down. The National Federation of Independent Business (NFIB) Small Business Hiring Plans Index fell to its lowest level since May 2020. Regional surveys by the US Fed indicate that employment in the service sector, excluding healthcare and education, continues to decline.

The chart below shows that hiring intentions tracked by the US Fed's regional surveys are below the average from 2015 to 2024. Actual employment growth in the private services sector is often closely tied to hiring intentions, which means that when hiring intentions decline, actual hiring tends to follow suit shortly after.

Tombs believes that after the "layoff wave" driven by the Department of Government Efficiency (DOGE), government jobs will continue to decline as federal employees who accept voluntary buyouts will be removed from payrolls in September—government jobs have already decreased by 59,000 this year, including a drop of 22,000 in May.

Following this trend, Tombs projects that the unemployment rate will peak at 4.8% in December.

Tombs states that, in summary, the labor market is weaker than it appears on the surface. Therefore, he believes that the US Fed will need to start cutting interest rates in September, to alleviate pressure on businesses before inflation peaks.