Transitory hotter inflation and a stable, but not solid, US labor market: Will the Fed hike?

 

·  Fine prints of the May US job report indicate a stable labor market, but not solid, as a 4.3% unemployment rate comes on the back of a -0.8% decline in LFP.

·       Despite a hotter May NFP job addition, the overall YTM average was around +114K, much lower than the +200K average standard for the US economy.

·       Real wage growth is now turning negative, while the overall economic situation may be indicating a stagflation/stagnation-like scenario.

On June 5, 2026, market focus was on the US NFP/BLS job report for May '26 and the overall employment situation in the world’s biggest economy amid Trump’s chaotic policies on immigration and a trade/tariff war with Iran.

The BLS Establishment Survey

The latest BLS establishment survey flash data (seasonally adjusted) shows that the U.S. economy (private + public/government sector) added +172K non-farm payroll (NFP) jobs in May '26 after adding +179K sequentially (m/m) and +13K yearly (y/y). The market was expecting an 85 K increase in NFP jobs. The US NFP employment covers public (government) and private sector employees/jobs, excluding the farming/agriculture industry.

 

After the latest revisions, the 3M rolling average (3MRA-YTM) of US NFP job additions was around +86K against +82K yearly (y/y). The 2025 average was around +10K against +122K in 2024 and +148K in 2019 (pre-COVID). The US job market may now be under meaningful stress due to Trump’s uncertain, bellicose policies on tariffs, war with Iran, and immigration & deportation despite the so-called big & beautiful bill (fiscal stimulus). Overall, the nominal number of US NFP employees was around 159001K in May '26 vs 158268K in Jan '25 under Trump 2.0. The average R/R in 2026 is now around +114K, far lower than the Fed standard of +175K on average. On a TTM basis, the US NFP added around +503K jobs in May '26 (from May '25) AT 46K/M. Overall, the YTM TTM average was around +29K/M.

The BLS flash data also shows the U.S. private sector (only private establishment/business employees) added +120K payroll jobs in May '26 against +177K sequentially and +20K year-over-year. The market was expecting a +75K gain against the ADP private payroll job addition of +122K in May.

After the latest revisions, the 3M rolling (3MRA-YTM) of US private NFP job additions was around +109K against +87K (y/y). The 2026 YTM average of NFP private payroll job addition was around +106K vs. +28K in 2025 and +1,489K in 2026. The pre-COVID longer-term (2014-19) average private payroll job addition was around +174K, indicating significant stress in the private sector amid Trump policy uncertainty. On a TTM basis, the US private NFP added around +677K jobs in May '26 (from May '25) at +62K/M. Overall, the YTM TTM average was around +49K/M.

 

After the latest revisions, the 3M rolling (3MRA-YTM) of US private ADP NFP job additions was around 62K against 83K for BLS NFP job additions. In 2025, the same was +33K (ADP NFP) vs. +28K (BLS NFP). The YTM TTM average was around +42K/M.

Overall, the nominal number of US NFP private employees was around 135614K vs 132624 for ADP in May '26. The YTM difference (NFP-ADP) was around +33K vs. +21K in 2025 and +28K in 2024.

The latest BLS Establishment survey flash data also shows the government payroll, i.e., employment in federal, state, and local governments, expanded by around 52K jobs in May '26 against 2K sequentially and -7K yearly. The market was expecting +10K government job additions in May '26. The sudden surge in government payroll jobs in May '26, along with a meaningful positive revision for the last two months, was primarily led by local governments of +55K. Local government drove much of the government sector gain (+55,000, mostly +44,000 in non-education roles like administration and public services). Federal hiring remained flat-to-negative due to efficiency cuts, while state government was slightly down. The local surge reflects routine catch-up hiring, budget cycles, and service demands. Looking ahead, as the 2026 midterms are still months away (November), election-related staffing may ramp up closer to voting (August-October).

After the latest revisions, the 3M rolling average (3MRA-YTM) of US government NFP job additions was around -4K in 2026 vs. +5K in 2025 (till May). The YTM-TTM average was around -20K/M.

After the latest revision, the 2026 (YTM) average for the US government payroll was around +8K against -15K in 2025, +37K in 2024, and 18K in 2019 (pre-COVID). The longer-term pre-COVID (2014-19) average government payroll addition was around +36K. Overall, under Trump 2.0, the US government payroll contracted drastically by (led by federal government jobs) 249K from 23,557K in Jan '25 to 23,387K in May '26 due to Trump’s policy to privatize the US economy almost fully and to improve the overall economic productivity.

The US Federal Government payroll jobs under Trump 2.0 are now under huge stress due to Trump’s perceived & flawed fiscal austerity narrative and DOGE’s kickout action. Trump is now trying to abolish as many federal government jobs (including intelligence officials) as possible to make the US economy driven by only the private sector, expecting higher efficiencies and productivity. But this policy is not working, and no economy in the world can survive only on the private sector.

Also, although Trump is trying to be 100% capitalist, some of his actions, like buying stakes of certain private companies, including chips, AI, and rare earth materials, are equivalent to state-sponsored socialistic capitalism! Trump’s perceived plan to provide a $2000 ‘tariffs’ check to most of the Americans (lower end of the pyramid) will make them even more shy, even China & Russia, the so-called kings of socialistic & communist policies. Trump always blasts the ‘lunatic left,' but in hindsight, ‘capitalist’ Trump or any US president, including the entire Congress (politicians), has no issue adopting ‘socialism’ in any financial crisis, which may leave even ‘socialist’ China behind.

For the last 3 months, the US economy added maximum jobs in private education & health services (+189K); leisure & hospitality (+144K); government (+66K, led by local government +84K─mainly education); transportation & warehousing (+65K─Trump tariff reliefs); professional & business services (+56K); construction (+41K─AI data center boom); and retail trade (+32K). The 3M NFP job addition was dragged by financial activities (-45K), information/tech (-9K─AI disruptions), and wholesale trade (-7.2K).

Overall, in the last 12 months under Trump 2.0, the US economy has lost significant jobs in government (-174K) but gained in the private sector (+677K). In summary, for the last 12 months, private education & healthcare services were the biggest employers for the US economy (as per the long-term trend), followed by leisure & hospitality (travel/tourism & hotels), construction (led by AI data centers and other manufacturing projects), retail trade, and other services (repair & maintenance, personal & laundry services, religious, grant-making, civic, professional, and similar organizations).

Almost all other private sectors dragged US employment under Trump 2.0, led by manufacturing (despite tall claims of reshoring amid tariff threats), mining & logging, transportation & warehousing, information & tech (AI disruptions), financial services, and professional & business services. The softening of the US employment situation is structural rather than cyclical amid Trump policy uncertainty and AI disruptions. Also, Trump’s chaotic tariff policies are causing supply chain issues for the US manufacturing sector, while almost all big CAPEX is happening in the AI sector. The high cost of living (affordability) crisis is also affecting discretionary consumer spending.

The 2M revision was +92K.

As per the latest revision in the establishment survey, the change in total nonfarm payroll (NFP) employment for March was revised up by +29K, and the change for April was also revised up by +64K. With these revisions, NFP employment in the last two months combined was revised up by +93K from what was previously reported.

The BLS Household Survey

The latest BLS household (HH) survey data shows the nominal number of the US civilian non-institutional population (>16 years of age) increased by +99K to 275054K in May '26, while the labor force increased by +83K to 170078K. The labor force participation rate was 61.8% in May '26 vs. 61.8% sequentially and 62.4% yearly, and the lowest since Oct '21. The TTM average was +167K/M.

 

In nominal terms, the US labor force declined by around -618K under Trump 2.0 from 170,696K in Jan '25 to 170,078K in May '26. The TTM average rate was -40K/M vs. the civilian population's +167K/M.

The current 3MRA-YTM of labor force addition was around -443K against the non-institutional civilian population (working age above 16 years) growth of +120K, while the labor force participation rate was 61.8% vs. 62.4% in 2027 and 62.6% in 2026. The pre-COVID average participation rate was around 63.1%, while the 2006 levels were around 66.4% (pre-GFC days).

As per the BLS Household (HH) survey, the U.S. economy has added +149K employed persons in May '26, against the contraction of -226K sequentially (m/m) and -654K yearly (y/y). The YTM TTM average was -65K/M.

The U.S. had 163,831K employed persons in Jan '25 and 162,771K in May '26; i.e., lost around 1,060K employed persons under Trump 2.0 so far. The pre-COVID (2018-19) average was around +206K/M. Post-COVID (2022-24) average was around +154K, which now plummets to -244K on average under Trump 2.0. The US BLS HH survey includes nonfarm payroll (NFP) employees (private + public/govt) and self-employed persons (including professionals, contractors, and agri-workers).

As per household survey data, the nominal number of unemployed persons increased by +134K to 7,373K in Apr '26 against -332 sequentially (m/m) and +24K yearly (y/y). The 3MRA-YTM was -56K vs. -37K in 2026. Overall under Trump 2.0, the nominal number of US unemployed persons increased by around +508K from 6865K in Jan '25 to 7373K in Apr '26.

In May '26, the U.S. unemployment rate was unchanged at 4.3% from 4.3% sequentially (m/m) and 4.3% yearly (y/y) and in line with the market expectations of 4.3%. The 3MRA-YTM was 4.3% vs. 4.0% (y/y), while the pre-COVID level was 3.6%.

The U-6 unemployment rate, including discouraged & underemployed workers, edged down to 8.1% from 8.2% sequentially, 7.8% yearly, and pre-COVID levels of 6.8%.

In May '26, the US employment rate was 95.7% vs. 95.7% sequentially and 95.7% year-over-year. The 3MRA-YTM was 95.7% in 2026 vs. 96.0% in 2025 and 96.3% in 2019 (pre-COVID). The TTM average was 95.8%.

In Apr '26, the US employment-to-population rate was 59.2% vs. 59.2% sequentially and 59.7% yearly, the lowest in over 4 years; the pre-COVID rate was 60.8%. The YTM TTM average was 59.6% vs. the 2025 average of 59.8%.

Further fine prints of BLS H/H survey data indicate the US NFP (Payroll) employed (private + public) persons were increased by +293K in May '26 vs. -522K sequentially and -337K year-over-year. The TTM average was -30K vs. +211K in 2025 and +201K on average in 2018-19 (pre-COVID).

Similarly, in Apr '26, the US self-employed persons were contracted by -144K vs. +296K (m/m) and -317K (y/y). The YTM-TTM average was -35K vs. -10K in 2025.

The YTM-TTM non-agri self-employed persons were -24K in May '26 vs. -17K in 2025.

 

Agri-workers' (wage + self-employed) YTM-TTM average was -11K vs. -13K in 2025.

 

The YTM-TTM average of part-time employed persons was +11K in May '26 vs. +59K in 2025.

A snapshot of US employed persons—H/H survey

The US multiple job holders' (excluding agri) TTM-YTM (May '26) average was -31K vs. +30K in 2025. Multiple job holders are now around 5.2% of employed persons, vs. 5.2% in 2025.

 

The US multiple job holders' (including agri) YTM-TTM average was +47K (5.7% of employed persons) vs. -194K in 2025 (4.3%) and -29K pre-COVID (4.5%).

The 2026-YTM (May '26) average US real wage growth (nominal growth - CPI) was around +0.6% vs. +1.0% in 2025 and +0.7% in 2024. The average US monthly wage (NFP employees) was around $4889 in Jan '25 and was $5149 in May '26. But the US real wage growth has already turned negative (-0.24%) in Apr '26 after CPI inflation surged +3.8% in Apr '26 following the March ’26 jump of +3.3% as gasoline prices soared due to higher crude oil prices amid the lingering Iran war. In May, the US CPI may surge further to 4.0-4.2%, and in that scenario, the US real wage growth would be around -0.5%.

Although Trump boasted about his tariffs in 2025, and theoretically they were around 20%, the actual weighted average tariff rate was around 8% (after various exemptions), and assuming 1/3^rd of that was absorbed by US importers/producers, global exporters/suppliers, and US consumers, the actual net effects of Trump's tariffs (after FX adjustment—higher USD) were almost negligible on the rate of inflation (price rise), even after a one-time effect to some extent (price rise).

JOLTS job openings data shows an improvement in 2026 after a terrible 2025 amid Trump’s chaotic policies, from trade/tariffs to illegal immigration wars.

Conclusions

Although at a glance, the May NFP report looks blockbusting, overall, the US labor market/employment situation may be stable but not solid, as the 4.2% average unemployment rate is coming under a lower labor force participation rate (62.2% vs. 62.6%). The US unemployment rate progressively surged from 3.6% in 2023 (LFP 62.6%) to 4.0% in 2024 (LFP 62.6%) and 4.3% in 2025 (LFP 62.4%); it is now 4.3% in 2026 (YTM) against LFP 61.9%. If the labor force grew normally around +1.0% rather than having negative growth, the unemployment rate would be much higher. Overall, NFP job additions are now running much below 100 on average, against 200 a few years ago.

In brief, under Trump 2.0 (since Jan '25 to May '26), as per the BLS survey:

Household survey

·       Total employed persons: 163831K vs 162771K (-1060K).

·       Total employees under payroll (public, Pvt., and Agri.): 152.247K vs 151.624K (-0.623K)

·       Self-employed persons: 11584K vs 11147K (-437K).

·       Total labor force: 170696 vs 170078 (-618K)

·       Labor Force Participation Rate: -0.8%

·       Unemployed persons: 6865K vs 7307K (-442K).

·       Unemployment rate: 4.0% vs. 4.3%

·       Employment/Population: 60.1% vs. 59.2%

·       Part-time workers: +751K

·       Agri workers (wage + self-employed): -283K

·       Multiple job holders (including agro): +1,073K

EST. Survey

·       Payroll Employees (Public + Pvt.): 158268K vs 159001K (+733K)

·       Private Payroll: +903K

·       Government Payroll: -170K

·       Multiple Job Holders (excluding agro): -346K

·       JOLTS job openings: +187K

·       Average real wage growth: +1.0% in 2025 vs. +0.7% in 2024; YTM-2026 (Jan-Apr) +0.6%; but already turned negative (-0.24%) in April '26 as headline CPI inflation soared to +3.8% due to higher oil (Iran war). If headline CPI surged to 4.00-4.2% in May, the real wage growth should be around -0.5%.

Overall, at a glance, under Trump’s unpredictable policies, the US economy may now be facing a stagflation-like scenario.

·       Higher cost of living/inflation (adverse effects of tariffs, supply chain disruptions, and higher cost of energy/fertilizers/commodities) (Avg CPI 3.0% in 2024 vs 2.7% in 2025 and 3.2% current 3MRA till May '26).

·       A higher number of unemployed persons despite a lower number of labor force; potential for higher unemployment.

·       Lower economic growth (2.1% in CY25 vs. 2.8% in CY24)

This follows just after the Fed cuts rates on December 10 by another 25 bps back-to-back as insurance against growing unemployment. The market is not expecting any further rate cut in H1CY26 or one rate hike, even under the new Fed Chair, Warsh (a Trump appointee), as he is sounding more hawkish than before.

The Fed has to act in a balancing way to bring down core inflation (average 2.6-3.0%) by around 100 bps for its inflation target. And at the same time, it has to ensure a headline unemployment rate below 4.5-5.0% (red light) and further bring it down to around 3.6% (pre-COVID levels, maximum inclusive employment). Thus, overall, the Fed has to ensure a neutral monetary policy—neither tight nor loose—to ensure a balancing act to bring down inflation without causing a sharp decline in employment. To ensure a soft landing, the Fed may continue to keep the real interest rate around +1.0% above the average (12M/6M) core inflation (CPI+PCE). Thus, the Fed may be on hold at least till Dec '26 amid transitory hotter US inflation (due to the SOH blockade and higher oil) and a stable labor market.

Bottom line

The Fed may be on hold—in wait & watch mode till at least Dec '26. But to bring down the higher probability of a rate hike in late 2026, the Fed's new chair and other influential Fed officials have to talk (jawbone) proactively and sound dovish. Now the question is whether the new Fed Chair, Warsh, will do that, considering his recent comments on lower Fed speeches (jawboning) by various Fed officials.

 

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