US job growth slows as tariff uncertainty leaves businesses in limbo

US job growth slowed in May amid uncertainty about the Trump administration's import tariffs, but solid wage growth should keep the economic expansion on track and potentially allow the Federal Reserve to delay resuming its interest rate cuts.

The ebbing labour market momentum reported by the Labour Department on Friday was underscored by sharp downward revisions that showed 95,000 fewer jobs were added in March and April than previously estimated over the two-month period.

The unemployment rate held steady at 4.2% for the third consecutive month because 625,000 people dropped out of the labour force, suggesting a lack of confidence in the jobs market. Surveys have shown that consumers are less optimistic about their prospects of finding a job in the event of being laid off.

Economists say President Donald Trump's flip-flopping on import duties has hampered businesses' ability to plan ahead. Opposition to Trump's tax-cut and spending bill from conservative Republicans in the US Senate and tech billionaire Elon Musk has added another layer of uncertainty for companies.

"Cracks in the façade of labor market resilience are now starting to show and the longer the tariff uncertainty and government spending cuts continue, the worse the labor market reports are bound to be," said Scott Anderson, chief US economist at BMO Capital Markets.

Nonfarm payrolls increased by 139,000 jobs last month after a downwardly revised rise of 147,000 in April, the Labour Department's Bureau of Labour Statistics said.

Economists polled by Reuters had expected the survey of establishments to show 130,000 jobs added after a previously reported gain of 177,000 in April. The payrolls count for March was slashed by 65,000 to 120,000.

Economists said factoring in the sharp downgrades to March and April data, payrolls last month rose by a meager 44,000 jobs. The revisions lowered the three-month average of employment gains to 135,000 from 155,000 in April.

The economy needs to create roughly 100,000 jobs per month to keep up with growth in the working-age population. That number could drop as Trump has revoked the temporary legal status of hundreds of thousands of migrants as part of his administration's immigration crackdown.

Employment gains remained concentrated in the healthcare sector, which added 62,000 jobs that were spread across hospitals, ambulatory services and skilled nursing care facilities. Leisure and hospitality payrolls rose 48,000, driven by hiring at restaurants and bars, which some economists welcomed as a sign of the economy's resilience.

Social assistance employment increased by 16,000 positions. Construction payrolls rose 4,000, though there were job losses among residential specialty trade contractors. Economists attributed those losses to work opportunities drying up because of tariffs.

There were also moderate employment gains in financial activities, transportation and warehousing as well as wholesale trade sectors.

But federal government payrolls decreased by 22,000 and are down 59,000 since January amid an unprecedented campaign by the White House to drastically reduce the government's footprint. The mass firings have been blocked by a federal judge. Reinstated workers put on paid leave are counted as employed. The same applies to those who have accepted buyout offers.

Manufacturing shed 8,000 jobs, mostly in machinery production. There were also job losses at retailers. Temporary help employment, a harbinger for future hiring, tumbled by 20,200 positions.

The share of industries reporting employment gains dropped to a 10-month low of 50.0% from 51.8% in April. Job growth mostly reflects worker hoarding by businesses, anchoring the labour market and economy through higher wages.

Average hourly earnings increased 0.4% after gaining 0.2% in April. In the 12 months through May, wages rose 3.9%, matching April's advance.

Stocks on Wall Street were trading higher. The dollar gained versus a basket of currencies. US Treasury yields rose.

WEAK HOUSEHOLD EMPLOYMENT

Employers' reluctance to lay off workers could keep the US central bank on the sidelines until the end of the year.

Financial markets expect the Fed will leave its benchmark overnight interest rate unchanged in the 4.25%-4.50% range at a policy meeting later this month, before resuming its policy easing in September.

"The policy uncertainty that has made firms cautious to hire has also made them cautious to let go of workers," said Sarah House, a senior economist at Wells Fargo.

"With inflation expected to move up in the coming months, we suspect the Fed will need to see more marked, and sustained weakness in employment before reacting to deteriorating labour market conditions."

Labour market fissures were also evident in the household survey from which the unemployment rate is derived. Household employment decreased by 696,000 jobs, a result of the decline in the labour force that some economists linked to Trump's immigration crackdown. Household unemployment increased by 71,000.

"Flows from employment to not in the labour force stepped up sharply from 4.4 million to 5.4 million, perhaps due to a 'chilling effect' from immigration policy," said Michael Gapen, chief US economist at Morgan Stanley. "This in part explains why the participation rate fell."

The labour force participation rate dropped to 62.4% from 62.6% in April, with the decline occurring mostly among the prime-age group. The employment-to-population ratio, viewed as a measure of an economy's ability to create employment, dropped to 59.7% from 60.0% in April.

Though the number of people working part-time for economic reasons fell, there was an increase in those holding part-time positions as the only option available.

While the median duration of unemployment dropped to 9.5 weeks after surging to 10.4 weeks in April, there were more people out of work for less than five weeks.

The government corrected some estimates in the household survey for April, which were related to the introduction of a redesigned survey sample. While these corrections did not affect the unemployment rate, labor force participation rate or employment-population ratio, they added to concerns about data quality amid cuts in staff.

"The unemployment rate would have risen to 4.3% if not for the decline in labour force participation," said Skanda Amarnath, executive director at Employ America. "The participation decline is disguising what was marginal deterioration in employment and the labour market in May."