Job growth heats up in May, cooling economists’ concerns

The U.S. job market grew far more than expected last month, shoring up confidence that economic momentum had returned after the bleak winter quarter and increasing the odds that the Federal Reserve will hike interest rates by the end of September.

The addition of 280,000 net new jobs in May, reported Friday by the Labor Department, was the most this year and came after a gain of 221,000 payrolls in April and about half that in March. Economic activity and hiring had tailed off early this year largely because of the harsh winter weather and the labor disruptions at West Coast ports.

Friday’s strong employment data raised hopes that employers will continue to hire at a healthy pace this year, even as more businesses are reporting labor shortages. Economists said small employers in particular have been stepping up their hiring as sales and profits have improved.

“The outlook is not exciting but solid,” said William Dunkelberg, chief economist at the National Federation of Independent Business. “Small businesses are carrying more of their weight.”

Growth in hourly wages continued to rise at a steady pace in May. The nation’s unemployment rate edged up a tic to 5.5% in May from 5.4%, but that was largely because more people entered the labor market.

Dunkelberg noted that the problem at the ports and the strong dollar were not as disruptive to small firms, which are less dependent on foreign sales. Between the Greek debt crisis, the slowdown in China and other trouble spots around the world, economic risks from abroad remain.

Still, the latest jobs report will reassure the Fed that U.S. economic growth remains firmly on track. And many analysts now think that the central bank will make its first rate hike in nearly a decade at its meeting in September instead of December.

Fed policymakers meet June 16-17 and again in July, but are not expected to take action as they wait for more information on employment and inflation, among other data.

On Thursday, the International Monetary Fund urged the Fed to hold off on raising rates until next year as the IMF marked down its outlook for U.S. economic growth this year to 2.5% from a projection of 3% earlier this year.

U.S. stocks traded lower Friday, but the dollar strengthened and the 10-year Treasury yield, a benchmark for mortgages, jumped on the jobs report.

Economists were particularly encouraged by the slightly faster increase in workers’ pay, which has been slow to come despite a job market that is increasingly tightening.

The Labor Department said average hourly earnings of all private-sector employees rose 8 cents to $24.96 in May, up 2.3% from a year ago and about a percentage point higher than core inflation. Though still modest, the pace of wage growth has risen steadily from an annual gain of 2% in February.

Analysts expect further advances in the months ahead, boosted in part by minimum-wage increases approved in a number of cities and states, as well as policies adopted by some large employers, such as Wal-Mart and McDonald’s, that recently lifted the pay floor for employees.

“Wage growth is starting to accumulate as the employment gap has narrowed,” said Alan Levenson, chief economist at T. Rowe Price Associates in Baltimore. “It wouldn’t be surprising if today marked the beginning of the rise in wage inflation.”

A growing number of businesses have reported more difficulty finding skilled workers, particularly in the construction and high-tech industries. That is starting to push up wages and salaries and give workers more opportunities to change jobs.

“We are seeing by far the highest placement of our graduates,” said Richard Wobbekind, associate dean at the Leeds School of Business at the University of Colorado, Boulder.

Colorado’s unemployment rate was 4.2% in April, well below the U.S. rate then of 5.4%, and even with the recent drop-off in the energy sector, Wobbekind said, the state’s job growth and consumer spending were surging ahead.

Colorado and other Western states are benefiting from stronger housing markets and an expansion in engineering and high-tech industries than some other areas of the country.

“We’re starting to see the momentum and confidence building when you look at the Western part of the economy,” Wobbekind said.

With stronger hiring and confidence, more workers sidelined during the recession and slow recovery are likely to be drawn back into the job market. That will tend to push up the unemployment figure, which is based on the total number of people with jobs and those looking for work.

The wage gains, along with a plunge in gasoline prices in the last year, should help juice the economy in the months ahead. Consumer spending accounts for about two-thirds of U.S. economic activity.

Although the economy contracted at an annualized rate of 0.7% in the first three months of the year, the U.S. should see economic growth rebound to a healthy 3% in the second and third quarters, said Stuart Hoffman, chief economist for PNC Financial Services Group.

Hoffman said the breadth of May’s job gains, well above the 220,000 expected, was impressive.

Apart from the mining and the information sectors, all major sectors added to their payrolls. The strong hiring spanned low-paying retail and restaurant outlets to high-paying computer systems design and other technical services. There were also hefty gains in healthcare.

“It’s certainly a strong month in terms of job creation,” said Thea Lee, an economist at the AFL-CIO in Washington. But she noted that the uptick in the May jobless rate showed that there’s still plenty of slack in the labor market, or people waiting in the wings for jobs or more hours of work.

“Up until now, you haven’t had the kind of dynamism to restore the economy to full employment and the incomes that were lost,” Lee said. “We’d like to see some pretty robust job growth over a protracted period of time. That’s when you will see full employment, and workers have more chances and the ability to change jobs without fear.”

Friday’s report showed that while unemployment has fallen, people unemployed for longer than six months still constituted about 29% of the total jobless. Also high by historical standards was the number of workers who are in part-time jobs but want full-time hours, rising in May to 6.65 million.

A broader measure of unemployment and underemployment, which includes involuntary part-time employees and workers too discouraged to look for jobs, was unchanged in May at 10.8%.

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