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The May 2024 jobs report presents a paradox: while the headline job creation number appears robust, underlying data suggests a softening labor market that will likely cause mortgage rates to reverse their recent decline. A deeper analysis reveals that the unemployment rate held steady only due to a drop in workforce participation, and the much-touted job gains are concentrated in noncyclical sectors and may be statistically overstated. For home buyers and real estate observers, this signals continued economic uncertainty influenced by volatile tariff policies.
The initial market reaction to the jobs data has been a key driver for mortgage rates. Earlier in the week, a surprisingly weak ADP employment report pushed rates downward. However, the official Bureau of Labor Statistics report showed the economy added 139,000 jobs in May, a figure slightly higher than the consensus expectation of 130,000. This surface-level strength has caused markets to reassess, making it likely that the recent dip in mortgage rates will be reversed. The immediate connection between strong employment data and higher mortgage rates is a standard market response, as it can influence the Federal Reserve's outlook on inflation.
Despite the positive headline, several indicators point to underlying weakness. First, the unemployment rate increased marginally from 4.19% to 4.24%. This rate held relatively steady not because of vigorous hiring, but primarily because the labor force participation rate dropped. If participation had remained constant, the unemployment rate would have been closer to 4.5%. This indicates that people are leaving the workforce, which is not a sign of strength.
Second, the composition of job gains is concerning. The bulk of the creation was in health and education—noncyclical sectors that are less sensitive to economic booms and busts. Meanwhile, manufacturing shed jobs, and federal government job losses are accelerating. This narrow base of growth is a warning sign.
The 139,000 job figure comes from the Current Employment Statistics (CES) survey, often called the "payroll survey." There is evidence that this survey has been consistently overstating job creation. This month's report included a downward revision of 95,000 jobs for the previous two months. A more accurate benchmark, the Quarterly Census of Employment and Wages (QCEW), which is a comprehensive count of employment from the Census Bureau, has consistently indicated that the payroll numbers are likely too high. This lagging data suggests the true health of the labor market is weaker than the initial headlines suggest.
The labor market has, overall, held up better than expected under persistent high tariffs. This resilience could mean businesses are better equipped to absorb higher costs than anticipated. However, the volatility of tariff policy is causing significant uncertainty. Based on our experience assessment, many businesses may be postponing major decisions on hiring and pricing, hoping for a policy resolution. If high tariffs remain in place for an extended period, this cautious stance may be unsustainable, potentially leading to more pronounced economic softening and labor market cracks in the future.
For those monitoring the housing market, the key takeaway is to expect continued volatility in mortgage rates driven by mixed economic signals. While the surface-level data seems to support strength, the underlying details suggest caution. Focus on long-term affordability rather than trying to time the market based on a single monthly report.
