The U.S. labor market is sending mixed signals, leaving both the Federal Reserve and Wall Street scrambling to make sense of its trajectory. On one hand, the economy under President Donald Trump’s renewed “America First” agenda has delivered strong job growth and rising wages, with the private sector leading the charge. On the other hand, the administration’s trade policies, particularly the sweeping use of tariffs, have introduced significant economic headwinds that could undermine these gains in the long term.
In May 2025, the private sector added 139,000 jobs, marking the third consecutive month of surpassing employment expectations. Notably, all net job gains came from American-born workers, a trend that has been consistent since Trump returned to office. Key industries such as leisure and hospitality, transportation and warehousing, and construction have been major contributors to this growth. Construction, in particular, has seen four straight months of job increases, signaling strength in the sector.
Workers are also benefiting from higher pay. Real average hourly earnings have risen nearly 4% over the past year, outpacing most economists’ expectations. Additionally, real disposable personal income has grown at a 7.5% annualized rate since Trump’s return to office, more than three times faster than during the final year of the Biden administration. This growth has been driven largely by private sector expansion, with 99.8% of job gains since January coming from non-government sectors—a stark contrast to the previous administration, when one in four new jobs were in government.
Despite these positive indicators, the Trump administration’s trade policies have cast a shadow over the economic outlook. Tariffs, while intended to protect American industries and generate federal revenue, have introduced significant distortions. Federal government employment, for instance, declined by 22,000 jobs in May, with a cumulative loss of 59,000 since January 2025. The broader economic impact of these tariffs is even more concerning.
The Penn Wharton Budget Model projects that the April 2025 round of tariffs will reduce long-run U.S. GDP by about 6% and average wages by 5%. Middle-income households could face a lifetime loss of $22,000—twice the impact of a similar-sized corporate tax increase. While tariffs are expected to raise $5.2 trillion in revenue over the next decade, this comes at the cost of greater economic distortion than a comparable hike in the corporate tax rate. The reduction in economic activity is expected to be more severe than most models predict, as tariffs decrease economic openness and could trigger higher bond yields or a drop in investment prices. All future households are expected to be worse off as a result.
Wall Street has responded to these developments with cautious optimism. The stock market rallied in May following the easing of certain tariffs and the announcement of a new U.S.-China trade agreement, with recession fears subsiding in the immediate aftermath. However, the mixed signals from ongoing tariff policies have introduced uncertainty for investors and businesses, particularly in sectors exposed to global supply chains and international trade. While the headline job gains and wage growth suggest a strong economy, the long-term risks posed by tariffs loom large, leaving both the Fed and investors to navigate a complex and volatile economic landscape.
The Trump administration’s trade policies have introduced another layer of complexity to the economic landscape. While the White House has paused or rolled back certain sector-specific and “Liberation Day” tariffs, a broad 10% tariff remains in place for nearly all imports, with exemptions for critical goods like semiconductors and pharmaceuticals. China, in particular, faces a 30% tariff, alongside specialized tariffs on steel, aluminum, and autos. These measures have created a mixed environment for businesses and investors, with some sectors benefiting from protection while others struggle with increased costs.
A significant development in May was the new U.S.-China trade agreement, which reversed some of the retaliatory tariffs imposed during the trade war. This move not only eased tensions but also spurred a rally on Wall Street, as markets welcomed the reduction in trade uncertainty. However, the administration’s broader tariff strategy continues to pose risks, particularly for industries reliant on global supply chains. The ongoing fluctuations in trade policy have left businesses cautious, with many delaying investment decisions until there is greater clarity on the future of U.S. trade relations.
Despite the strong labor market and wage growth, the Federal Reserve has signaled a cautious approach to monetary policy. The central bank is closely monitoring the interplay between the robust job market and the potential economic drag from tariffs. While the strong labor data might typically suggest tighter monetary policy, the Fed is weighing the risks of slowing growth due to trade-related headwinds. This delicate balance underscores the challenges of navigating an economy simultaneously experiencing strong job gains and significant policy-induced distortions.
One area of concern is the manufacturing sector, which saw a decline in employment in May despite the overall positive job numbers. This decline highlights the uneven impact of tariffs, which have raised input costs and disrupted supply chains for many manufacturers. While the administration’s trade policies aim to protect domestic industries, the short-term pain for some sectors could undermine the broader economic expansion if not carefully managed.
Looking ahead, the interplay between the labor market, trade policy, and monetary policy will be critical in shaping the economic trajectory. The strong private-sector job growth and rising wages are positive indicators, but the long-term risks associated with tariffs and the uncertain investment climate could temper enthusiasm. Wall Street, while responding positively to easing trade tensions, remains on high alert for any signs of further policy shifts that could disrupt the fragile balance between growth and stagnation.
Conclusion
The U.S. labor market presents a dual narrative of robust job growth and wage increases alongside the looming risks of trade policies. While the private sector drives employment gains and real wages rise, the imposition of tariffs casts a shadow on long-term economic stability. The Federal Reserve’s cautious monetary policy reflects the delicate balance between a strong labor market and potential economic drag from tariffs. As the administration navigates this complex landscape, the interplay between trade policy, monetary strategy, and economic indicators will shape the future trajectory of the U.S. economy.
Frequently Asked Questions
How do tariffs impact the U.S. economy?
Tariffs have led to a projected 6% reduction in long-run U.S. GDP and a 5% decrease in average wages, affecting middle-income households by approximately $22,000 over their lifetime.
Which industries are most affected by tariffs?
Manufacturing, particularly sectors reliant on global supply chains, faces increased input costs and disrupted supply chains, leading to employment declines despite overall job market strength.
How is the Federal Reserve responding to economic conditions?
The Fed adopts a cautious approach, monitoring the balance between a robust labor market and potential economic slowdown due to tariffs, signaling a potential pause in rate adjustments.
What is the economic outlook for the U.S.?
The outlook is uncertain, with strong job growth and wage increases offset by the risks of tariff-related economic distortions and cautious business investment decisions.