Friday’s jobs report could show how much US employers will bend before they break

Recent data suggests a potential softening in the US labor market, with economists forecasting a slowdown in job growth to 130,000 in May and jobless claims rising to their highest level since October 2024. Companies, especially smaller ones, are exhibiting hiring hesitancy amid economic uncertainty and the impact of tariffs, as evidenced by the layoff of a US employee at Passenger Clothing due to increased import duties; announced job cuts through May have surged 80% year-over-year, driven largely by federal workforce reductions and broader economic pessimism, signaling a potentially protracted impact on employment.

Analysis

The U.S. labor market is exhibiting signs of potential softening, driven by a confluence of factors including new tariff impositions, federal workforce reductions, and broader economic uncertainty. Passenger Clothing's decision to pause U.S. operations and lay off staff, attributing this to a 50% increase in duties on $1 million of imported goods, exemplifies the direct impact of trade policy on business viability and employment. Economists anticipate a slowdown in job growth, with May's consensus forecast at 130,000 new jobs, down from 177,000 in April, and the unemployment rate expected to hold at 4.2%. Rising labor market stress is further evidenced by weekly jobless claims reaching their highest since October 2024 and continuing claims nearing a three-and-a-half-year high. Data from ADP indicates a significant drop in private sector hiring in April and May, to 60,000 and 37,000 jobs respectively, reflecting what Nela Richardson of ADP terms "hiring hesitancy" as firms navigate uncertainty. The federal government itself has reduced its workforce by 26,000 jobs between February and April. Overall, announced job cuts through May 2024 have surged 80% year-over-year to 696,309, the third-highest January-May period since 1993, with 294,000 cuts linked to the Department of Government Efficiency and 131,257 to market/economic conditions. While May's announced cuts of 93,816 decreased 12% from April and current layoff rates remain below pre-pandemic levels, the high volume of announced cuts suggests a potential for further weakening in employment figures as these intentions materialize. The hiring rate, at 3.5% in April, also remains subdued compared to pre-pandemic levels, indicating a cautious approach from employers.

Key Decisions for Investors

• Investors should closely monitor upcoming labor market reports and jobless claims data for confirmation of the softening trend and assess its potential impact on consumer-driven sectors.
• Consider reviewing portfolio allocations in companies highly exposed to import tariffs or those with significant reliance on federal government contracts, given the direct impacts and announced workforce reductions.
• Evaluate the resilience of companies, particularly smaller enterprises, to sustained economic uncertainty and their ability to manage potentially slower demand or hiring freezes.