Hiring Slows Amid Trade Tensions, With Only 75,000 Jobs Added In May

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Updated at 4:46 p.m. ET

Hiring slowed sharply last month, as U.S. employers added just 75,000 jobs. The unemployment rate held steady at 3.6%.

The monthly snapshot from the Labor Department suggests businesses are increasingly cautious in the face of the Trump administration's ongoing trade wars.

The employment gains in May were well below economists' forecasts of 185,000 jobs and the three-month average of 151,000 jobs. Job gains for March and April were also revised downwards by a total of 75,000.

The weak jobs number could increase the odds that the Federal Reserve cuts interest rates sooner rather than later.

"This is not the Fed capitulating to financial markets or capitulating to a president," said chief economist Diane Swonk of Grant Thornton. "It is them reacting to an economy that is now weakening. Some of it's self-inflicted. But nonetheless, they have to deal with it."

Prospects for a rapid rate cut propelled another rally on Wall Street Friday. The Dow Jones Industrial Average and the S&P 500 index each rose more than 1%.

Manufacturing continues to be a soft spot, with just 3,000 factory jobs added in May. An index of manufacturing activity released Monday fell to its lowest level in 2 1/2 years.

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Manufacturing is especially sensitive to trade disputes, which can raise costs, disrupt supply chains and depress foreign demand. Last month, the administration increased tariffs on $200 billion worth of imports from China. The president has also threatened to impose tariffs on imports from Mexico, beginning next week.

"There's increasing evidence that the ongoing trade war here is beginning to have some tangible effects on the U.S. economy," said Tim Quinlan, a senior economist at Wells Fargo Securities. "We're not on the edge of the cliff here. But the pace of expansion in [manufacturing] is the slowest of the Trump era."

The picture is only somewhat brighter in the much larger services sector, where tariffs seem to be taking less of a toll. An index of service activity released on Wednesday showed accelerating growth. But private employers added just 82,000 service jobs in May, less than half the number of the month before.

"The question moving forward is whether or not slowing growth in the goods sector could pull down the services sector," said Martha Gimbel, director of economic research at Indeed Hiring Lab. "Goods industries in general are more sensitive to trade wars, commodity prices and other unpredictable factors."

An escalation of the trade battle with Mexico could be especially damaging to the auto industry.

"I don't think it's possible to overstate how integrated the North American manufacturing process is," Quinlan said. "Quintessentially 'American-made' vehicles rely on parts made in Mexico. So Ford's F-150, for example, is 15% Mexican made. Forty-four percent of the Chevy Silverado comes from Mexico. So supply chain disruptions here could really pose significant harms to U.S. business interests."

The weaker-than-expected jobs report will be another factor for central bankers to consider as they work to preserve economic growth in the face of rising trade tensions.

"We don't know how or when these issues will be resolved," Federal Reserve Chairman Jerome Powell said this week. "We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion."

The Fed's interest rate-setting committee is set to meet in less than two weeks.

The labor force participation rate was unchanged in May after falling in both March and April. Less than 63% of the eligible population is currently working or looking for work. Unless more people who are on the sidelines can be lured back into the workforce, it will be difficult to maintain a robust pace of hiring.

Wages continued to inch up, although not as fast as one might expect, given the rock-bottom unemployment rate. Wages rose by an average of 3.1% compared with a year earlier.