The Jobs Report Paradox What a 696,000 Employment Plunge Means for the Fed
Over the past few weeks, we have focussed closely on the jobs market. Why so much attention? With inflation moving towards the Federal Reserve's target, any further easing will increasingly depend on clear signs of labour market weakness. While recent payroll data and a stable unemployment rate appear reassuring, the underlying reality is notably different.
The Bureau of Labor Statistics (BLS) employment report for May 2025 illustrates why headline figures can be misleading. The report indicated a modest payroll gain of 139,000 jobs; however, a closer look reveals a much weaker picture. Strikingly, total employment measured by the Household Survey fell sharply by 696,000. This is not simply a statistical anomaly—it may signal a hidden deterioration in the labour market.
Each month, the BLS produces two employment measures from separate surveys. The Establishment Survey provides the headline payroll figure, counting each job on employer payrolls separately—even multiple jobs held by one person. This approach can inflate perceptions of strength. In contrast, the Household Survey directly interviews individuals, counting each person as employed only once, while including self-employed and agricultural workers who are not captured by payroll figures.
In May, payroll jobs rose slightly by 139,000 to 159.6 million, yet the Household Survey reported total employment fell by 696,000, dropping to 163.3 million. This divergence is largely because around 625,000 people exited the labour force entirely—they were not merely unemployed; they stopped looking for work altogether. This coincided with an additional 813,000 people categorised as "not in the labour force," including retirees, students, those with family responsibilities, and discouraged jobseekers.
As a result, the labour force participation rate fell 0.2 percentage points to 62.4%. When the working-age population grows (as it did by 188,000 in May), yet fewer people actively engage in employment, deeper structural issues emerge. The headline unemployment rate remaining steady at 4.2% masks this underlying weakness, as it excludes individuals who have stopped actively seeking employment.
Moreover, the strength in payroll data may be overstated by the BLS's Birth/Death Model, which estimates jobs created or lost by businesses not yet captured in surveys. This model relies on historical data, potentially problematic in a rapidly shifting economy. Recent downward revisions (totalling 95,000 fewer jobs in March and April) reinforce this concern, indicating that payroll growth may have been previously overstated, making the current divergence even more significant.
Investors should not rely solely on headline payroll numbers. May’s employment report clearly demonstrates that headline strength can mask genuine underlying weakness. Declining total employment and increased workforce exits point to structural challenges potentially limiting future economic growth and productivity. Investors should therefore adopt a cautious perspective, acknowledging the employment landscape may be weaker and more vulnerable than initial headlines suggest.
For the Federal Reserve, which targets maximum employment and stable 2% inflation, these nuances are critical. While typically prioritising payroll figures, the Fed will also closely monitor labour force participation and overall employment levels. If underlying employment continues to weaken, this could prompt policymakers to adopt a more accommodative stance sooner rather than later. So, despite the positive headlines citing payroll growth, the Fed may in fact be much closer to resuming its easing cycle than many currently assume.
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