Earlier this morning, the Labor Department reported that the economy added 138,000 jobs in the month of May, below expectations for an addition of around 184,000 and a pullback from April's initial estimate of +211,000 jobs (you can review our note on April's jobs report here). The number may also come as a surprise given the strong ADP jobs report yesterday, which indicated that firms across the country added 253,000 workers in May. We note that the ADP and Labor Department reports have diverged from each other in recent months.

Unfortunately, a weak headline number today perhaps looks even more sluggish as revisions on March and April's estimates were reduced by a total of 66,000 jobs -- March was revised down to 50,000 jobs added (from 79,000 on the last estimated) and April was revised down to 174,000 (down from 211,000). Over the past three months, job gains have averaged around 121,000. Five months into the year, average job growth for 2017 is down to 162,000 a month, which is down from 189,000 in 2016 and 226,000 in 2015.

This jobs report was highly anticipated, not only due to the market's desire to see continued strength in what has been the bellwether for the economy, but also because the Federal Reserve's policy meeting later this month is expected to result in the next rate hike, which would be the second out of three expected for the year. Recall that the Fed has been consistent in its commentary in recent months, highlight recent weakness in certain sectors as "transitory" and continuing to lean towards three rate hikes this year (and gradual increases over time). You can read our analysis of the May Fed meeting minutes here).

Although the headline number was weaker than expected today, the underlying numbers appear strong enough to support a Fed decision to raise interest rates later this month. The question now perhaps becomes whether the economy can sustain a pace that will warrant an additional hike in September. Fed funds futures, a tool for wagering on rate shifts, are now pricing in about 94% probability for a rate hike in June whereas expectations for a second rate-hike by September sit at only 24%.

Balancing the disappointing revisions and slower-than-expected hiring in May, the unemployment rate dipped again, to 4.3%, down from 4.4% in April (March was 4.5%). Unemployment is now at its lowest level since March 2001 -- a big accomplishment for the Fed, who tracks unemployment when making decisions regarding whether to raise interest rates. Although the lower unemployment rate is encouraging, we note that a smaller share of Americans participated in the labor force this month. The labor force contracted sharply, with the number of Americans in the labor force falling by 429,000, suggesting that many able-bodied Americans are remaining on the sidelines despite what appears to be growing optimism within the economy.

The labor force participation rate (which accounts for the number of Americans looking for work or currently working) fell to 62.7% from April's 62.9% level. For historical context, the participation rate has steadily trended lower since a peak in 2000 (reflecting an aging population), but there has been incremental optimism in recent months that stagnation and some signals of uptick may indicate that some workers are coming off the sidelines, as confidence in the expanding economy increases. May's continued downtrend from April, however, may quell those expectations and raise doubts for now.

For those skeptical of the headline measure of unemployment (for reasons like the decline in the labor force participation rate), a different, broad measure of unemployment and underemployment known as the U-6 -- which accounts for those working part-time due to the inability to find full-time work -- was 8.4% in May (lowest since November 2007), down from 8.6% in April and 8.9% in March. The U-6 had averaged around 8.3% in the years before the recession.

Wages were roughly in line for May's report, remaining relatively muted. Average hourly earnings for private-sector workers increased by $0.04 to $26.22 per hour in May. From a year earlier, wages rose 2.5%, in line with April and lower than March's 2.7% 12-month increase. Overall, 2.5% year over year is steady, but unspectacular wage growth, suggesting the labor market might not be as tight as the unemployment rate would suggest. Even so, with inflation appearing to have abated in recent months, the consistent wage growth could be enough to boost the amount of money Americans can spend.

The pace of wage raises has slowed since December's 2.9% increase. The slight disappointment is likely reflected in falling yields, which perhaps suggest that the market believes the Fed may not need an urgency to tighten - after the report was released, 10-year Treasury yields fell to levels below those seen right after the election. That being said, we know all too well that the data can change quickly, and we have more than half the year left to accelerate to levels where the Fed is comfortable raising rates two more times.

By sector, employment in healthcare rose by 24,000 jobs in May (higher than the 2017 monthly average of 22,000, but underwhelming compared to 2016's monthly average of 32,000). The mining industry added 7,000 jobs last month. Professional and business services continued their uptrend, adding 38,000 jobs (below the 2016/2017 monthly average of about 46,000). Food services saw an increase of 30,000 jobs. On the other hand, retailers and manufacturers slashed jobs.

Overall, the report was certainly short of spectacular, but is likely enough ammo for the Fed to move later this month (as suggested by the CME Group's Fed watch tool). The bigger focus will now be on the longer-term, questioning whether we are beyond peak employment and if the labor market can continue to carry the economy. In the immediate term, the report is unlikely to have much impact on the market, other than on financials (which are negatively impacted by declining yields), as strong earnings reports continue to fuel optimism regarding improving fundamentals for companies moving forward.