Mortgage Rates to Reverse Recent Decline as Unemployment Holds Steady

The official May jobs report remained strong on the surface and mortgage rates will reverse a decline from recent days following a weak ADP employment report earlier this week. Under the hood, however, there are clear warning signs in this report, even though the labor market has generally held up better than expected under high tariffs.

A surprisingly weak ADP jobs report on Wednesday drove a fall in mortgage rates, but the official May jobs report came in slightly stronger than consensus, which means mortgage rates are likely to reverse the earlier decline. There were 139,000 jobs created in May, slightly lower than last month’s gain of 147,000 jobs, but higher than the 130,000 expected. The unemployment rate increased only marginally from 4.19% to 4.24%. On the surface, the labor market is healthy so far, despite tariff volatility. Because immigration has declined so much over the past two years, the “break even” number of jobs needed to keep employment levels steady is now lower. That means job creation can decline without affecting unemployment.

However, under the surface there are clear reasons to suspect the labor market is softening. Federal government job decline is accelerating as the impact of the DOGE cuts become apparent. Manufacturing is shedding jobs and the bulk of the job creation is being driven by health and education, noncyclical sectors. Importantly, the unemployment rate only held because of the drop in household participation. Without that drop, the unemployment rate would be closer to 4.5%. That means people lost jobs and the unemployment rate only held steady because so many gave up and left the labor force. The way to reconcile this with 139,000 jobs created is that these numbers come from two different surveys. The payroll survey, which gives us the job creation number, has been consistently overstating job creation for a while. These numbers have been repeatedly downwardly revised in subsequent months. Indeed, this month, the report includes a downward revision of 95,000 jobs for the previous two months. And the QCEW, a lagging report from the Census that provides more accurate estimates, indicates that today’s payroll number is likely overstated.

Overall, however, the labor market is not showing as many cracks as expected under high tariffs. It’s possible that the economy and businesses are better equipped to absorb these tariff levels than anticipated. It is also possible that the economy will only hold up for so long. With tariff policies being so volatile, many businesses may be holding off on making major decisions on headcount and prices—hoping that the policies get unwound. But if tariffs remain high, they may not be able to hold off for long. 

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