May job gains ease fears of recession

A report showing robust job growth last month provides strong evidence that the U.S. economy is rebounding from a dismal first quarter, analysts said.

The Labor Department reported Friday that employers added a better-than-expected 157,000 jobs in May, the most in two months.

That boosted confidence that the near-zero growth rate from this year’s first three months was a blip, not a harbinger of a recession.

In addition, vigorous business spending and investment is expected to boost job growth later this year and offset the chilling effects of the housing downturn, experts said.

“As long as businesses continue to hire, the expansion will remain firmly intact,” said Mark Zandi, chief economist of Moody’s Economy.com.

The May job tally surpassed analyst estimates of a 135,000 increase. It also followed a subpar April, when a revised 80,000 jobs were added in the weakest monthly showing in 2 1/2 years. The economy has added an average of 100,000 jobs each month this year, well below the 200,000 that was the norm during the late-1990s boom.

As expected, the unemployment rate remained a relatively low 4.5% in May, and average hourly earnings rose to $17.30, a 0.3% increase.

A separate report by the Commerce Department on Friday provided good news on inflation. A benchmark inflation measure watched closely by the Federal Reserve, which excludes volatile energy and food prices, increased just 0.1% in April. That brought the annualized increase down to 2%, just inside the Fed’s inflation comfort zone of between 1% to 2%.

The dip marks the first time in 14 months that inflation, which stood at 2.1% in March, has fallen into the Fed’s target range. That likely signals the Fed will hold off on raising interest rates later this year -- even if growth picks up as expected, analysts said.

Economic growth slowed to an annual rate of 0.6% in the first quarter from 2.5% in the final three months of last year, dampened by a 15% fall in investment in housing in the first quarter.

But many analysts believe the economy is already rebounding, growing at an annual rate of 2.3% in recent months and likely to reach 3% by year’s end.

Haseeb Ahmed, U.S. economist at J.P. Morgan Chase & Co., predicts the economy will add just enough jobs -- an average of between 120,000 and 150,000 a month -- to sustain an expansion during the rest of the year.

“The economy has not downshifted enough to question the expansion,” he said, citing the stock market rally of recent weeks and easing inflation.

“Markets are generating enough income to keep the expansion going,” he said.

On Wall Street, stocks reached fresh record highs. The Dow Jones industrial average rose 40.47 points to 13,668.11, its 26th new high this year. The Dow is up 9.7% year to date.

Although average annual growth in corporate profits slowed from 15% last year to 7% during the first quarter of 2007 -- and is likely to slow further -- businesses can still afford to hire, Zandi said. That’s because they have saved money by keeping inventories low and getting more work out of increasingly productive workers rather than staffing up, Zandi said.

Business spending also is rising, buoyed by increased demand for U.S. goods from China, India, Europe and Canada, said economist Brian Bethune, U.S. economist for Global Insight in Lexington, Mass.

“Even though the domestic economy is sluggish and a little off track, the overseas economies are helping exports and corporate earnings,” Bethune said. While economic growth still appeared “anemic,” he added, and business investment “tentative,” “overall the situation looks good for corporate America.”

However, there are some factors that could jeopardize rebounding growth, including rising interest rates.

The jobs report drove long-term rates up Friday, pushing the yield on the 10-year Treasury note -- a benchmark for mortgage rates -- to 4.95%, up from 4.89% on Thursday and the highest since August.

The average 30-year mortgage rate nationwide this week was 6.42%, an eight-month high, according to mortgage finance firm Freddie Mac. Rising mortgage rates could hurt the struggling housing market.

Consumer spending -- which accounts for two-thirds of the economy -- also could weaken in the face of rising gas prices and consumers’ reduced ability to borrow against their homes, Zandi said. Job losses in the retail sector and weak personal income growth also could indicate some fragility in consumer spending growth.

Retail sector jobs fell by 5,000 in May, the Labor Department report said. A separate report by the Commerce Department on Friday showed personal incomes dipping by an unexpected 0.1%.

“If consumers do pull back more aggressively, that will be a problem,” Zandi said.

But rising wages could support growth in consumer spending, experts said. During the last 12 months, wages have grown a steady 3.8%. That sustained consumer spending, which rose a healthy 0.5% in April, according to the Commerce Department.

In May, the education and health services sector added 54,000 jobs; leisure and hospitality added 46,000 jobs and government grew by 22,000 jobs.

But manufacturing, retail and housing-related sectors remained weak. Manufacturers shed 19,000 jobs. Construction employment remaining flat during a normally busy season.

The SurePayroll Small Business Scorecard, which tracks hiring data from 18,000 businesses nationwide with up to 100 employees, saw hiring increase 1.8% this year as of May, compared with a 0.2% decline in 2006. Salaries are up nationwide by 2.7% this year, an average rise of $850.

Michael Alter, president of Glenview, Ill.-based SurePayroll, a payroll processing firm, said small businesses have been nimble enough to avoid being hurt by the housing slump.

“The five-person plumbing business still has as much business as before, it’s just different--it might be repairs versus the new home site,” Alter said.

molly.hennessy-fiske@

latimes.com

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Times staff writer Tom Petruno contributed to this report.