Employers added a mere 38,000 workers to payrolls last month, the weakest hiring rate since September 2010, the Labor Department said in its monthly nonfarm payrolls report Friday. The reading confounded economists, who were expecting the creation of at least 160,000 jobs in May. It was also wholly inconsistent with the ADP report on Thursday, which showed the creation of 173,000 private sector jobs in May.[1]

Job creation in March and April was revised down by a combined 59,000, pointing to a sharp slowdown in hiring in the first half of the year.

The bad news didn’t stop there. The national unemployment rate fell to 4.7% in May from 5% the month before. While falling unemployment is normally a good thing, last month’s decline was mostly attributed to a massive exodus of people from the workforce. Nearly half a million Americans stopped looking for work in May,[2] a disturbing signal for an economy that is still in recovery mode.

The labour force participation rate fell to 62.6% in May from 62.8% the previous month.

For the record, people who aren’t actively searching for work are not included in the official calculation of unemployment.

The reading shocked Wall Street to a standstill Friday, as investors cut ties to riskier positions ahead of the weekend. The lackluster report also sent the US dollar into freefall, as investors began to doubt the prospects of a Federal Reserve rate hike this summer. As of Friday, the likelihood of a June rate hike stood at a mere 4%, according to the CME FedWatch tool – an expression of the market’s views of the future of US monetary policy. The probability of a July rate hike also fell to 31% after spending most of the week above 50%.[3]

The US dollar index, which tracks the performance of the US currency against a basket of global peers, plummeted 1.6% to 94.03. The decline erased around half of the dollar’s gains over the previous month.

As is normally the case, a weak dollar drove demand for gold and other precious metals, a trend expected to continue should Fed officials maintain a dovish tone at their next policy meeting on June 14-15.

A dovish Fed could be just what Wall Street needs to extend its recent rally, which faded last week, as markets lacked the fundamental trading catalyst to push prices higher. The large-cap S&P 500 Index remains stuck near 2,100 and faces stiff resistance near all-time highs around 2,130. A break above this level is considered necessary for stocks to extend their bullish streak.

The immediate concern for market participants is whether the May NFP numbers were just a one-off or part of a much bigger trend that could spell bad news for the economy. To be sure, the US economy has added just 116,000 jobs per month over the past three months, well below the average monthly growth of 219,000 during the previous year.[4] Based on the ADP numbers and the general trend, the May readings appears to be an obscure outlier. However, there’s no doubting that the pace of hiring has weakened as the US labour market approaches maturity (at least on paper).

Economists are urging caution with regards to the latest figures, as it’s difficult to draw conclusions from a singe data point.

The US economy expanded just 0.8% annually in the first quarter, revised estimates showed last month. The same report showed that consumer spending, which accounts for more than two-thirds of economic activity, expanded at the fastest pace in nearly seven years.[5]

Another challenge plaguing the US economy is weak earnings growth. The May NFP report showed average hourly wages rose just 0.2% from April and 2.5% from a year ago. While many analysts have flagged weak earnings as a major concern, the problem has been mostly framed around inflation (or the lack thereof). Weak earnings growth says a lot more about the economy than just weak inflation. It also suggests that the quality of jobs being created are lower skilled and therefore command lower wages. At the higher end of the skills spectrum, employers report challenges finding qualified workers in skilled trades, science, mathematics and information technology. Challenges sourcing highly skilled workers could make it difficult for the economy to sustain its recovery long-term.

The June nonfarm payrolls report will be released early next month. While it is still too early to tell what the headline figure will convey, the labour market’s hiring pace is likely to be slower when compared to the previous two years.

This week’s report on initial jobless claims can also provide clues about the health of the US labour market. Jobless claims spiked in May, reaching their highest level in over a year.[6] As it so turned out, more layoffs last month were also associated with a slower pace of hiring.

Initial jobless claims measure the number of layoffs in the labour market. Economists typically consider layoffs below 300,000, in seasonally adjusted terms, to be a good proxy for a tight labour market. Despite the recent spike in firings, initial jobless claims remain well below that critical level.

[1] ADP (June 2, 2016). ADP National Employment Report: Private Sector Employment Increased by 173,000 Jobs in May.

[2] United States Department of Labor, Bureau of Labor Statistics (June 3, 2016). Employment Situation Summary.

[3] CME Group. FedWatch Tool.

[4] Harriet Torry (June 3, 2016). “Weak Hiring Pushes Back Fed’s Plans.” The Wall Street Journal.

[5] Reuters (May 27, 2016). “US Q1 gross domestic product up 0.8% vs. 0.9% expected.” CNBC.

[6] Josh Mitchell (May 12, 2016). “U.S. Jobless Claims Spike Again.” The Wall Street Journal.