Nonfarm payrolls report looms: what could move markets and test investor nerves

The stakes are rising ahead of the May nonfarm payrolls report. For months, investors bet on a soft landing: cooling inflation, slowing job growth, and a gentle glide toward rate cuts. 

Data points released this week suggest that job growth is cooling, inflation pressures are shifting, and business confidence is starting to wear thin.

Forecasts are mixed, and with a conflicting Administration and Federal Reserve, things could get even more complicated for investors.

Are job gains slowing faster than expected?

The latest signals suggest the labor market is no longer bulletproof. May’s ADP National Employment Report showed a steep slowdown, with just 37,000 private-sector jobs added.

That’s the weakest monthly reading in over two years, and well below economists’ forecasts of 114,000. 

Losses were broad, stretching across education, health care, manufacturing, and trade. Even small and large firms both cut staff.

The ISM Services PMI, another leading indicator, fell to 49.9, marking the first contraction in the sector in nearly a year. 

Within the report, new orders collapsed to 46.4, suggesting fading demand. Businesses cited high costs, tariff uncertainty, and delays in hiring. 

While the services employment index ticked up to 50.7, firms described slowing decisions and increased scrutiny for every new hire.

The data indicates that the economy hasn’t stalled completely, but it is downshifting. 

Wage growth remains strong, which can mask weakness. Job switchers saw pay increase by 7%, and job stayers by 4.5%, according to ADP.

But strong wages combined with falling hiring often signal pressure, not strength.

Is demand for workers still holding?

In contrast, the JOLTS report for April showed job openings rising unexpectedly to 7.39 million, up from 7.20 million in March. 

Hiring also picked up, reaching its highest level in nearly a year. At first glance, it looks like labor demand remains intact.

But other signals from the report were less encouraging. The quits rate dropped, showing that workers are more hesitant to leave their jobs. 

Layoffs rose to their highest level since October. Openings declined in manufacturing, education, and leisure, the sectors most exposed to discretionary spending and tariffs.

The ratio of openings to unemployed workers — a key Fed metric — held at 1.0, back to pre-pandemic levels. 

That’s a sign that labor supply and demand are in better balance, but also a confirmation that the extreme tightness of 2022 and 2023 has passed.

The JOLTS data is known for month-to-month swings and heavy revisions.

And real-time trackers like Indeed’s job postings index show that openings have actually declined during the same period.

Together, it suggests that the April labor strength may have been short-lived.

Tariffs are making everything more complicated

The labor slowdown comes at a time when trade policy sparks even more uncertainty.

Businesses across multiple sectors reported cost increases and planning delays in the ISM survey. 

The prices paid index jumped to 68.7, the highest since November 2022. Input costs are rising again, and businesses are already passing those costs onto consumers, according to data from the New York Fed.

This creates a difficult setup for the Federal Reserve. On one hand, the labor market is slowing. On the other, inflation pressures are not going away, and some are clearly being driven by trade policy. 

Fed chair Jerome Powell has warned that tariffs could cause inflation to stay higher, for longer. He’s urged caution, and the Fed held interest rates steady at 4.25%–4.50% during its last meeting.

But that hasn’t stopped President Trump from applying public pressure. After the ADP miss, he posted on Truth Social: “Too Late Powell must now LOWER THE RATE.” 

Just days earlier, Trump reportedly met Powell face to face and told him the Fed was “making a mistake.”

Despite the noise, Fed officials are split. Some argue for looking through tariff-driven inflation. Others fear the inflation may be sticky enough to delay any easing. 

For now, markets are betting on a cut in September. That bet will either strengthen or unravel depending on what Friday’s report reveals.

What is the consensus?

The consensus forecast for May’s nonfarm payrolls is +130,000 jobs, down from +177,000 in April. 

The unemployment rate is expected to hold steady at 4.2%. Average hourly earnings are forecast to rise 0.3% month-over-month and 3.9% year-over-year.

Bank of America is more optimistic, projecting +150,000 jobs, but warns that “tariff-related volatility” could weigh on hiring in trade and transportation. 

Even so, they don’t expect a major downside shock or broad layoffs just yet. BofA also sees no shift in Fed policy unless labor weakness becomes more widespread.

April’s report surprised to the upside, but it also came with 58,000 downward revisions to February and March.

Labor force participation increased to 62.6%, and employment growth was strongest in healthcare, finance, and social assistance.

But revisions suggest previous months weren’t as solid as they seemed, and sector strength is now narrowing.

How will markets react?

Based on the full sweep of data, the May report is likely to come in below consensus. A print in the range of +95K to +115K jobs is now more likely than not. 

There’s a reasonable chance the unemployment rate ticks up to 4.3%, especially if labor force participation continues to climb. 

Wage growth is expected to stay firm, around 0.4% month-over-month, driven by worker churn and prior pay pressures.

If confirmed, this would mark the second consecutive month of job market deceleration.

Combined with weak ISM and ADP data, and uncertainty from tariffs, the overall signal is that the labor engine is losing power.

The picture is not yet recessionary; but it’s no longer strong.

For markets, the impact will be direct. A weaker print below 100K would likely boost bonds, pull yields lower, and raise the probability of a Fed rate cut by September. 

Stocks may initially slip on growth concerns but could rebound as easing expectations rise. 

The dollar would weaken, especially against currencies tied to central banks that are already cutting. Gold may rally again if stagflation risks dominate headlines.

If the report surprises to the upside, that would be above 150k, rate cut bets will fade, yields will jump, and the market will have to reprice the entire trajectory. 

But the data suggests that won’t be the case. The labor market is still standing, but the slowdown is here. Investors who ignore that signal do so at their own risk.

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