Wage Growth Slows, Payrolls Beat Expectations: What It Means for The Fed’s Policy

 

---

U.S. Economic Data on May 2, 2025: Soft Wage Growth Reinforces Dovish Bias

Overview

Following the dovish economic signals released on May 1, 2025—including rising jobless claims and continued contraction in manufacturing—the latest batch of data on May 2 offers a deeper view into the state of the U.S. economy. This time, the focus shifted to employment growth, wage inflation, and factory orders. The key takeaways?

• Payrolls beat expectations, but the pace is decelerating.

• Wage growth is softening, both on a monthly and annual basis.

• Labor force participation is rising, easing pressure on wage inflation.

• Factory orders surged, though slightly below consensus.

Taken together, the data confirms a dovish macroeconomic narrative, with some nuances from a labor market that remains resilient but is gradually cooling. This reinforces expectations that the Federal Reserve is likely to maintain a patient, accommodative stance in the coming months, while keeping an eye on inflationary risks.

---

Key Data Released on May 2, 2025

Below is a breakdown of the most recent economic indicators:

Non-Farm Payrolls (April)

• Actual: 177,000

• Previous: 185,000

• Consensus: 130,000

Payroll growth exceeded consensus expectations, suggesting the labor market retains some strength. However, the pace of hiring continues to moderate, with April's figure down from the previous month. This trend is more consistent with a soft landing scenario rather than labor market overheating.

Unemployment Rate (April)

• Actual: 4.2%

• Previous: 4.2%

• Consensus: 4.2%

The jobless rate remained steady at 4.2%, indicating that while hiring is slowing, it is not deteriorating rapidly. This stability supports the idea of a gradual deceleration in the broader economy.

Average Hourly Earnings MoM (April)

• Actual: 0.2%

• Previous: 0.3%

• Consensus: 0.3%

The monthly change in wages came in below expectations, marking a slowdown in wage growth. For the Fed, this is a welcome sign that inflationary pressures in the labor market are cooling.

Average Hourly Earnings YoY (April)

• Actual: 3.8%

• Previous: 3.8%

• Consensus: 3.9%

Annual wage growth also missed expectations, further reinforcing the narrative that wage-driven inflation may be losing momentum.

Participation Rate (April)

• Actual: 62.6%

• Previous: 62.5%

• Consensus: Not Available

A modest uptick in the participation rate suggests more people are entering or re-entering the labor force. This increase in labor supply helps ease wage pressure, contributing to the overall dovish tone of the data.

Factory Orders MoM (March)

• Actual: 4.3%

• Previous: 0.5%

• Consensus: 4.5%

Factory orders surged well above the prior month’s level, narrowly missing consensus. While this could be viewed as a sign of manufacturing resilience, it does not significantly alter the broader narrative of a cooling economy.

---

Wage Growth: The Fed’s Key Concern

Perhaps the most significant insight from this data release is the slowing pace of wage growth. With both monthly and annual wage gains falling short of forecasts, the Federal Reserve can breathe a little easier. Wage inflation has been one of the Fed’s primary concerns as it weighs the risk of sticky core inflation, particularly in the services sector.

Lower-than-expected earnings growth helps justify a pause—or even cuts—in interest rates. If this wage deceleration continues, it could bring overall inflation closer to the Fed’s 2% target, creating more room for policy easing.

---

Labor Market: Resilient, But Slowing

The stronger-than-expected Non-Farm Payrolls number might initially look hawkish. However, a closer examination reveals that:

• The growth rate is slowing (185K → 177K), indicating a gradual deceleration.

• Unemployment is stable, not declining, which shows no signs of overheating.

• The participation rate is rising, which could lead to more subdued wage inflation ahead.

This combination points to a labor market that is no longer tightening, but is instead normalizing—ideal conditions for the Fed to adopt a more patient stance.

---

Manufacturing and Factory Orders: A Mixed Signal

Factory orders increased significantly, indicating robust activity in March. However, manufacturing data from the ISM survey (released the day before) continues to show contraction. This disconnect suggests that while certain sectors are experiencing bursts of demand, the overall manufacturing outlook remains subdued.

From a policy standpoint, the Fed is more likely to focus on the trend in employment and inflation than on one month of strong factory orders—particularly when paired with soft labor and wage data.

---

Policy Implications: Still Dovish, With Slight Nuance

Why the Data Supports a Dovish Stance

• Soft wage growth reduces pressure to keep rates high.

• Rising participation rate adds slack to the labor market.

• Steady unemployment suggests no overheating.

• Moderating payrolls aligns with a soft-landing narrative.

Hawkish Nuance

• Stronger-than-expected headline payrolls could give hawkish Fed members some reason for caution.

• Factory orders jump may signal pockets of strength.

That said, these nuances are not strong enough to shift the broader policy direction. The Fed has consistently signaled that it is data-dependent, and this week’s data—including the jobless claims, ISM indices, and wage growth—overwhelmingly point to a more accommodative environment.

---

Market Impact: A Positive Backdrop for Risk Assets

Financial markets are likely to view this mixed—but largely dovish—data set as supportive for risk-taking. Specifically:

• Equities should continue benefiting from lower rate expectations.

• Bond yields may stabilize or fall, especially on the long end of the curve.

• Growth stocks and rate-sensitive sectors (tech, consumer discretionary, REITs) are likely to outperform.

Investors are increasingly pricing in the possibility of rate cuts in Q2 2025, especially if upcoming inflation data confirms the disinflationary trend suggested by today’s wage data.

---

Risks to Watch

Despite the generally positive reaction, there are still risks that could alter the Fed's course:

1. Sticky services inflation: If upcoming CPI/PCE data shows core inflation remains high, especially in services, the Fed may hesitate to cut.

2. Reacceleration in payrolls: A sudden pickup in job growth could reignite wage pressures.

3. Consumer confidence and spending: A weakening labor market could eventually hurt consumption, impacting broader growth.

---

Conclusion: The Dovish Tilt Holds

The economic data released on May 2, 2025, reinforces the dovish narrative that began to solidify with earlier reports this week. While headline payrolls offered a modest surprise, the slowdown in wage growth and increase in labor participation are the real story—and both favor a more accommodative policy stance.

The Federal Reserve is unlikely to raise rates further under these conditions, and market participants are now focused on the timing and magnitude of potential rate cuts on June, 2025.

For equities, particularly those in growth-oriented and rate-sensitive sectors, the path remains favorable. But as always, investors should stay attuned to evolving data—especially inflation indicators that could complicate the current narrative.

Enjoyed this article?
Take your trading further with exclusive premium content, including stock picks, fundamental analysis, and DCF valuations — available to purchase individually.
👉 Darrisman's – Access the full content now!

Other related post

U.S. GDP Contraction, Cooling Inflation, and the Fed's Path Forward: What the Data Means for Future Policy

Fed Faces Dovish Pressure as Job Openings and Confidence Slide | Rate Cut Expectations Rise on Weak U.S. Data

Markets Cheer Dovish Fed Outlook After Weak Jobless and ISM Data

China Manufacturing PMI Dip: Impact on Global Trade and Energy Outlook