Labor Market Resilient Amid Services Contraction and Manufacturing Weakness
Weekly Economic Review: June 6, 2025
Job openings increased unexpectedly in April; manufacturing activity contracted for the third consecutive month, and May services activity slipped into contraction for first time in nearly a year; businesses added more jobs than expected in May, but at a moderated pace.
Key Summary:
It was a busy week for economic data releases, beginning with reports of an unexpected increase in job openings for April. The rise was primarily driven by gains in private sector industries such as professional and business services, along with health care and social assistance. These gains were partially offset by declines in accommodation and food services, state and local education, and manufacturing. The ratio of job openings to unemployed individuals remained steady at 1.0, consistent with pre-pandemic norms. Hiring activity climbed to its highest level since May 2024. Meanwhile, the number of workers voluntarily leaving their jobs decreased, suggesting a decline in confidence about finding new employment opportunities.
Manufacturing activity contracted for the third consecutive month in May, following a brief two-month rebound that came after 26 straight months of contraction. Supplier deliveries reached their highest level since June 2022, signaling longer lead times and growing difficulty for purchasing managers to source goods and materials—raising the risk of potential shortages. Meanwhile, new orders, employment, and order backlogs showed improvement, but inventories dropped to a four-month low as businesses wrapped up early purchasing ahead of upcoming tariffs. Prices paid also fell to a two-month low. Trade activity weakened significantly: exports fell to a five-year low, and imports plunged to their lowest level in 16 years, largely due to U.S. tariffs and retaliatory measures from other countries.
Service sector activity contracted unexpectedly in May for the first time since June 2024, with the ISM Services Index falling to 49.9. A reading below 50 signals contraction, and this marks only the fourth such occurrence in 60 months. This decline was primarily driven by significantly reduced demand, lower business activity, and the impact of higher tariffs. Prices paid for materials and services rose for the 96th consecutive month, reaching their highest level since November 2022 and indicating continued cost pressures for businesses. Meanwhile, supplier deliveries expanded for the sixth straight month, indicating longer lead times as companies adjusted their supply chains. Inventory sentiment, reflecting how current inventory levels align with business needs, rose to the highest level since July. This indicates that businesses continue to view inventories as excessively high.
Businesses added more jobs than expected in May, driven primarily by gains in the health care & social assistance and leisure & hospitality sectors. In contrast, manufacturing—particularly vulnerable to tariffs—saw a slight decline. Federal government employment also continued its four-month downward trend, reflecting ongoing efforts to reduce the size of the federal workforce.
Job figures for April and March were revised downward by a combined total of 95,000, suggesting that overall job growth has been gradually cooling. This slowdown is likely due to rising business costs from tariffs and heightened economic uncertainty.
The unemployment rate held steady in May, largely because both overall employment and the labor force declined—potentially reflecting the effects of government policies on immigration and employment. Wage growth accelerated, but the labor force participation rate fell, indicating fewer people are working or actively seeking work. Layoffs edged down slightly, while the number of workers voluntarily quitting their jobs dropped significantly – suggesting reduced confidence in the job market. Employment in temporary help services, often a leading indicator of labor demand, also declined.
Let’s take a closer look at the latest data released last week, including the Institute of Supply Management (ISM) reports on manufacturing and business services sectors, the Job Openings and Labor Turnover Survey (JOLTS), and the job creation and employment situation data.
ISM Report on Manufacturing:
The ISM announced the manufacturing sector’s activities for May. The ISM manufacturing index, which measures the health of the manufacturing sector from the perspective of purchasing managers, registered 48.5 in May, down 0.2 from 48.7 in April and unchanged from one year ago. A reading below 50 indicates contraction in the manufacturing sector, which accounts for roughly 10% of the economy. However, the index showed continued economic expansion for the 61st month after a single month of contraction in April 2020, as the index exceeding 42.5 over a period generally indicates an expansion of the overall economy.
Most surveys measuring demand and output indicated contraction but at a slower pace, while input indicators started weakening. On the demand side, the new orders index remained in contraction territory, while the new export orders index declined further. The backlog of orders index continued to fall, but the pace of the decline slowed. Meanwhile, the customers’ inventories index dropped to very low levels, which is typically seen as a positive sign for future production.
In terms of output, as measured by the production and employment indices, the production index improved slightly from April’s very low reading. However, factory output still contracted, suggesting that businesses are continuing to revise their production plans downward in response to ongoing economic uncertainty. The employment index also showed a modest improvement but remained in contraction, indicating that layoffs are still occurring.
Inputs—which include supplier deliveries, inventories, prices, and imports—showed signs of strain. The inventories index entered contraction territory after a period of expansion, as businesses completed their front-loading activities ahead of tariff implementations. The supplier deliveries index continued to reflect slow performance. Price increases driven by tariffs eased slightly, while the imports index contracted significantly.
ISM Report on Business Services Sectors:
The ISM released its May report on economic activity in the service sector, which accounts for 70% of the private economy in both employment and GDP. The ISM Services Index registered 49.9 in May, down 1.7 points from April’s reading of 51.6, indicating a slight contraction in the sector.
The Prices Index climbed to 68.7, a 3.6-point increase from April’s 65.1, exceeding market expectations of 65.0—largely due to the impact of tariffs. The Business Activity Index, which mirrors factory production, fell 3.7 points to 50.0, indicating a neutral reading and ending a 59-month streak of expansion. Twelve industries reported growth, led by mining; accommodation and food services; arts, entertainment, and recreation; and educational services. Three industries reported contraction.
The New Orders Index, a key forward-looking indicator, dropped 5.9 points to 46.4, entering contraction territory for the first time since June 2024. Meanwhile, the Employment Index rose to 50.7, up 1.7 points from April, returning to expansion after two months of contraction. The Supplier Deliveries Index increased to 52.5, up 1.2 points, marking the sixth consecutive month of slower delivery performance—readings above 50 indicate longer delivery times.
JOLTS:
The Bureau of Labor Statistics (BLS) reported an increase of 191,000 job openings in April, bringing the total to 7.39 million—up from a revised 7.20 million in March (initially reported as 7.19 million). This figure surpassed market expectations of 7.10 million. On a year-over-year basis, job openings declined by 228,000. The monthly increase was primarily driven by gains in professional and business services (+171,000), health care and social assistance (+102,000), and retail trade (+46,000), partially offset by declines in accommodation and food services (−135,000), state and local education (−51,000), and manufacturing (−16,000). Three of four U.S. regions experienced gains in job openings; the Midwest was the exception.
The ratio of job openings to unemployed individuals—a key metric monitored by the Federal Reserve to assess labor market tightness—held steady at 1.0 in April. Meanwhile, the number of hires rose by 169,000 to 5.57 million, up from 5.40 million in March. This increase was largely driven by gains in accommodation and food services (+106,000), professional and business services (+69,000), construction (+42,000), and health care and social assistance (+31,000), partially offset by declines in retail trade (−53,000), finance and insurance (−31,000), and wholesale trade (−17,000). The Northeast was the only region to report a decline in hires. On an annual basis, hires decreased by 11,000.
Layoffs increased by 196,000 to 1.79 million in April, following a revised decline of 190,000 in March to 1.59 million (up from an initial estimate of 1.56 million). The April figure exceeded market expectations of 1.61 million and represented a year-over-year increase of 199,000. The monthly rise in layoffs was primarily driven by increases in professional and business services (+82,000), accommodation and food services (+57,000), health care and social assistance (+52,000), and construction (+26,000). Layoffs rose in the Northeast, South, and Midwest, while the West saw a slight decline.
Voluntary resignations (quits) fell by 150,000 to 3.19 million in April, following an increase of 94,000 in March to 3.34 million (revised from 3.33 million). The April figure came in below market expectations of 3.27 million. Year-over-year, quits declined by 220,000. The quits rate—which measures the rate at which workers voluntarily leave their jobs, excluding retirements—decreased to 2.0% in April from 2.1% in March.
Job Creation and Employment Situation:
The BLS reported that businesses added 139,000 new jobs in May, following 147,000 jobs created in March (revised down from 177,000). May’s job growth came in higher than the anticipated 126,000 due mainly to contributions from health care (+62,000), leisure and hospitality (+48,000), and social assistance (+16,000). In contrast, federal government employment decreased by 22,000 in May, contributing to a total decline of 59,000 jobs since January.
April’s job creation figure was revised down by 30,000. Similarly, March’s figure was revised down by 65,000 from 185,000 to 120,000. Combined, the revisions for May and April are 95,000 jobs lower than previously reported. Consequently, the three-month average of monthly job growth, which helps smooth out monthly fluctuations, rose to 135,000 in May, up from a revised 123,000 in April (previously 155,000).
The unemployment rate held steady at 4.2% in May, in line with expectations, largely due to declines in both employment (down 696,000) and the labor force (down 625,000). Looking beyond the rounded figure, the rate actually rose slightly from 4.19% in April to 4.24% in May—just shy of rounding up to 4.3%.
The number of job losers (or layoffs) slightly increased by 2,000 to 3.46 million, driven mainly by a slight increase of 7,000 in temporary layoffs, which was mostly offset by a decrease of 5,000 in permanent layoffs. Meanwhile, the number of job leavers – unemployed individuals who voluntarily quit their jobs to seek new employment elsewhere – decreased by 151,000 to 704,000 in May, following a decrease of 15,000 to 855,000 in April. These declines reflect concerns about the difficulty of finding new employment. Additionally, employment in temporary help services, a leading labor market indicator, fell by 20,200 to 2.51 million in May, after a modest increase of 3,100 in April.
The labor-force participation rate, which measures the percentage of working-age people who are employed or actively seeking work, declined to 62.4% in May from 62.6% in April, falling short of market expectations. The prime-age participation rate (the rate for those between the ages of 25 and 54) also declined. Meanwhile, the number of people working part-time for economic reasons – those who would prefer full-time employment but are working part-time due to reduced hours or inability to find full-time jobs – decreased by 66,000 to 4.62 million in May, following a decrease of 90,000 in April. Additionally, the multiple jobholders as a percentage of total employed decreased by 283,000 to 5.3% (8.86 million) in May from 5.4% (8.87 million) in April.
Wage growth, measured by average hourly earnings, rose by 0.4% in May after a 0.2% increase in April, which came in higher than expected. On an annual basis, wages grew by 3.9%, matching April’s pace and surpassing the anticipated 3.7%. Meanwhile, average weekly hours for all employees remained unchanged at 34.3 hours in May, in line with market expectations.
Conclusion:
The job creation and employment situation report released on Friday highlighted the resilience of the labor market, but also indicated emerging signs of weakness. As tariff uncertainties and government spending cuts persist, labor market reports are likely to become increasingly negative.
Treasury yields edged higher this week, with the two-year, five-year, and ten-year yields closing at 4.04%, 4.13%, and 4.51%, respectively—up 15, 17, and 10 basis points from the previous week. The most notable movement occurred on Friday, with yields rising in the belly of the yield curve, driven by a stronger-than-expected jobs report and easing concerns over tariffs.
On the rate cut expectation front, the market projects a 77% chance of one 0.25% rate cut and a 100% chance of one 0.25% cut in 2025. The first 0.25% cut is expected at the September FOMC meeting with a 68% probability, which is considered a 50/50 chance. However, the market anticipates a 100% of chance of one 0.25% cut in October.
Next Week’s Economic Calendar:
Markets will be closely watching several key economic indicators this week for signals on the economy’s trajectory. The NFIB Small Business Optimism Index is released on Tuesday. On Wednesday, attention will turn to the release of the May Consumer Price Index (CPI) report, followed by the Producer Price Index (PPI) on Thursday. After a 0.2% monthly increase and a 2.3% year-over-year rise in April, the CPI is expected to climb another 0.2% in May and 2.5% year-over-year—potentially the largest annual increase in three months. Excluding food and energy, the core CPI is projected to rise 0.3% for the month and 2.9% year-over-year, slightly above April’s 2.8% gain. On the wholesale inflation front, the Producer Price Index (PPI) is expected to rise 0.2% in May and 2.6% year-over-year. The core PPI, which excludes food and energy, is projected to increase 0.3% for the month and 3.1% year-over-year.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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