US adds 172,000 jobs in May, doubling forecasts and pushing rate-hike bets above 60%

Hiring accelerates past all estimates

The US economy added 172,000 nonfarm payrolls in May, the Bureau of Labor Statistics reported on Friday, dwarfing the 85,000 gain that economists polled by Reuters had expected. April's figure was revised up to 179,000 from the initially reported 115,000, and March was revised to 214,000 from 185,000, a combined upward adjustment of roughly 93,000 jobs. The unemployment rate remained at 4.3% for the third consecutive month, while the number of unemployed people edged down to about 7.3 million from 7.4 million in April.

The labor market, while not accelerating, has shown more resilience than the unrevised data implied, which reduces any urgency for the Fed to act on the employment side of its mandate.

The diffusion index, which measures the share of industries hiring, rose to 54.4 in May, marking its fifth straight month above 50 after spending nine of twelve months below that threshold in 2025.

Leisure, local government and healthcare lead

Leisure and hospitality added 70,000 jobs in May, the largest monthly gain since January 2023 and far above the sector's twelve-month average of 14,000. Diane Swonk, chief economist at KPMG, noted that hiring received an extra lift from preparations for the upcoming World Cup matches co-hosted by the United States this summer. Local government payrolls grew by 55,000, food services and drinking places added 48,000, and healthcare employment rose by 35,000, including a 26,000 increase in ambulatory care services and 11,000 in home healthcare.

Those gains were partially offset by losses in financial activities, which shed 22,000 jobs, insurance carriers and related activities (down 11,000), and commercial banking (down 3,000).

Markets price in a hawkish turn

The stronger-than-expected report reshaped interest-rate expectations. Futures markets now assign a 65% probability to a Fed rate increase by the December meeting, up from 48% before the data, according to LSEG estimates. For the June meeting, markets still expect the central bank to hold its benchmark rate steady at 3.50% to 3.75%. The CME FedWatch tool showed a 98.2% chance of no move in June, while the odds of a quarter-point hike by year-end exceeded 40%.

From the Fed's standpoint, the narrative has clearly shifted from when they'll cut again to if their next move is even a cut. Yields across the curve jumped higher post-payrolls, with Fed futures now fully pricing in a rate hike by year-end.

The two-year Treasury yield, most sensitive to Fed policy expectations, rose 10 basis points to 4.15%, while the 10-year yield climbed 6 basis points to 4.54%. The 30-year yield widened to 5.01%. The dollar index gained 0.2% to 99.60. US equities fell, with the Nasdaq composite down 1.2%, the S&P 500 off 0.7%, and the Dow Jones Industrial Average lower by 0.3%.

Resilience despite energy and policy shocks

The labor market's momentum has persisted through multiple headwinds. The US-Israeli war with Iran has driven up oil prices and shipping costs through the Strait of Hormuz, yet the Federal Reserve Bank of Boston published an analysis arguing the American economy is far more resilient to energy price increases than in past decades. Fiscal stimulus, including tax and tariff refunds following the Supreme Court's February decision striking down President Trump's tariffs, has bolstered corporate profits, which rose by $40.4 billion in the first quarter.

People look ahead, they see all the growth that's going to come years from now, and it's making them feel wealthier, so they spend. It's making them feel more optimistic, so they invest.

Labor force participation for workers aged 25 to 54 ticked up to 83.9%, even as immigration restrictions have depressed overall labor force growth to near zero. Economists now estimate the break-even employment level, the number of jobs needed monthly to absorb working-age population growth, has fallen to between zero and 50,000 because of the immigration crackdown.

European markets slip, sterling weakens

In London, the FTSE 100 closed up 0.1% at 10,368.05, while the FTSE 250 dropped 1.0%. The CAC 40 in Paris ended down 0.3% and Frankfurt's DAX 40 fell 0.8%. The pound traded at $1.3371, down from $1.3436 on Thursday, and the euro slipped to $1.1542 against the dollar. Sterling firmed against the euro to 1.1583.