Why the ‘Hot’ May Jobs Report Should Worry Investors (Hint: It’s Not Interest Rates)

The stock market spent much of last week digesting a surprisingly strong employment report that appeared to confirm the U.S. economy remains on solid footing. According to the Bureau of Labor Statistics, employers added 172,000 jobs in May – more than double the 85,000 expected — reinforcing the narrative that economic growth remains resilient despite elevated interest rates and geopolitical uncertainty. 

The report also had an immediate market consequence: expectations for Federal Reserve rate cuts largely evaporated, while the probability of rate hikes returning to the discussion moved higher. Yet beneath the headline number lies a more complicated picture — one that investors should not ignore.

A Strong Jobs Report Just Made the Fed’s Job Harder

For months, investors had been betting that slowing economic growth and easing inflation would allow the Federal Reserve to begin cutting interest rates later this year. The May jobs report changed that conversation.

A labor market that continues generating more than 170,000 jobs per month suggests demand remains healthy. Combined with inflation that remains above the Fed’s 2% target, policymakers now have little incentive to lower rates. In fact, stronger-than-expected employment data increases the risk that inflation could remain sticky.

That’s because interest rate cuts stimulate economic activity. Lower borrowing costs encourage spending, investment, and hiring. When inflation is already rising, adding more fuel to the economy can make price pressures worse.

President Trump has argued that recent inflation pressures are largely transitory and tied to disruptions stemming from the conflict with Iran. His position is that once those geopolitical pressures ease, prices should normalize while the labor market continues demonstrating the underlying strength of the economy.

Granted, that argument isn’t without merit. Energy prices often have an outsized impact on inflation readings. But the Federal Reserve cannot base policy on what inflation might do. It must respond to what inflation is doing now.

The Headline Number Doesn’t Tell the Whole Story

The headline showed 172,000 jobs added in May. That’s the figure most investors saw. Yet another number buried in the report paints a less encouraging picture.

According to BLS data, the number of Americans unemployed for 27 weeks or longer rose by 155,000 in May to 1.99 million people. That’s the highest level recorded since December 2021. Even more notable, long-term unemployment has increased by 524,000 people over the last 12 months. That marks the largest year-over-year increase since August 2021.

The trend becomes even more concerning when viewed as a percentage of total unemployment:

The 27.5% reading is the highest since December 2021. It has climbed roughly 9 percentage points since the start of 2023 and data from Bloomberg shows it now sits above every post-recession peak outside of the 2008 financial crisis and the 2020 pandemic recession.

Why Investors Should Pay Attention

Surprisingly, long-term unemployment is not typically a leading indicator. It’s a lagging one. People generally become long-term unemployed after economic weakness has already begun affecting hiring decisions. Companies stop expanding payrolls, job openings decline, and workers who lose positions take longer to find new employment.

That appears to be what economists increasingly describe as a “low-hire, low-fire” environment. Businesses are not conducting mass layoffs, but they also aren’t hiring aggressively.

In that context, the labor market can simultaneously create 172,000 new jobs while a growing number of unemployed workers remain stuck on the sidelines. That’s why the annual increase of 524,000 long-term unemployed Americans deserves attention. The headline and the composition are telling different stories.

By itself, the figure does not signal a recession. However, when combined with softer purchasing managers’ index readings, moderating job openings, and slowing economic growth, it raises the odds that labor-market momentum is weaker than the headline payroll number suggests.

Key Takeaway

In short, last week’s jobs report was strong enough to push Federal Reserve rate cuts further into the future and revive concerns that inflation could remain elevated. That’s the headline story.

The deeper story is that nearly 2 million Americans are now unemployed for more than six months, the highest level in over four years. Long-term unemployment has risen by 524,000 over the past year even as payroll growth remains positive.

For investors, that means both narratives deserve attention. The economy is still creating jobs, but a growing share of unemployed workers are struggling to find them. Regardless of whether Trump is correct that inflation proves temporary, the labor market is sending mixed signals. 

While the headline numbers celebrate fresh job gains, the sharp rise in long-term unemployment signals that the labor market’s foundations may be cracking — investors who ignore the full picture do so at their peril.