Unemployment Dips but Job Growth Slows

The nation’s overall unemployment rate dipped slightly to 5.1% in May, the Labor Department reported Friday, but job creation declined to its lowest rate in more than three years, prompting many economists to predict that the Federal Reserve Board will act speedily to cut interest rates.

“There are some expectations that these signs of slowdown will lead the Federal Reserve to loosen its monetary policy, which means some easing of interest rates,” said Sandra Shaber, an economist with The Futures Group, a private consulting company in Washington.

“There seems to be little evidence here of serious inflationary pressures, and little reason for the Fed to tighten any more.”

Fed to Decide on Rates

The Fed, which had caused a yearlong run-up in interest rates, is expected to decide early next week whether inflationary pressures have abated sufficiently for it to relax its tight grip.

The markets expected it to. The Dow Jones industrial average surged by 27.20 points to 2,517.83, its highest level since shortly before the crash of October, 1987. Bond prices also rose sharply as market-determined interest rates tumbled.

Southwest Bank of St. Louis announced that it would trim its prime rate to 11% from 11.5%, effective Monday. If other banks follow its lead, it could result in reduced borrowing costs for some consumers.

The Labor Department reported that the overall jobless rate declined from the April figure of 5.2% but remained above its recent low of 4.9%, recorded in March. The civilian unemployment rate, which excludes members of the armed forces, also fell last month, to 5.2% from 5.3%.

About 6.4 million persons were unemployed in May, somewhat fewer than the nearly 6.6 million recorded during the same period last year.

Only 101,000 New Jobs

But the total number of those employed, 108.2 million, included only 101,000 new jobs, the smallest monthly increase since March, 1986. Job gains have averaged 160,000 during the last three months, well off the average of 275,000 during the previous 12-month period, the Labor Department said.

“People are very concerned about the U.S. trade imbalance and competitiveness of American products and exports,” Shaber said. “The fact that job growth and manufacturing have been very, very poor all year raises concerns about any further improvement in closing the U.S. trade gap.”

Although it reported scant job growth in May, the department increased its estimate of job creation in April to 206,000 from 117,000.

‘Time to Lower Rates’

“The message of today’s dismal employment report should be unambiguously clear to Fed policy-makers: It is time to lower interest rates,” said Richard Rahn, chief economist for the U.S. Chamber of Commerce.

“Employment in manufacturing has come to a standstill in the past few months, while overall employment growth is way below the pace of 1988,” Rahn said. “Clearly, the economy has slowed far more than the Fed intended, and continuation of its high interest rate policy threatens to throw us into a recession.”

Paul Getman, a financial economist with the WEFA group, an economic consulting firm in Bala-Cynwyd, Pa., said he believes the Federal Reserve Board will act as early as next week to trim the federal funds rate, the rate that banks charge one another for overnight loans.

“I think next week it will likely lower the rate from its current range of 9 3/4 to 9 7/8 to probably 9 1/2 to 9 5/8,” he said.

But Lyle Gramley, chief economist for the Mortgage Bankers Assn. and a former Fed member, said he thought it unlikely that the Fed will reduce interest rates on the basis of the May unemployment report alone.

Employment in the goods-producing industries, which had experienced some strength between October and January, slowed considerably between February and April and dropped by about 35,000 in May, the Labor Department said. Employment in both construction and manufacturing was at about the same level in May as it was in January.

Industries Losing Jobs

“More individual industries were losing jobs than were gaining them,” Janet L. Norwood, commissioner of the Bureau of Labor Statistics, told the congressional Joint Economic Committee.

“Even in the service-producing industries, the overall growth of about 135,000 jobs from April to May was quite slow, and none of the major industry divisions showed particular strength,” Norwood said. “This sector is especially important in analysis of employment developments now, since it employs nearly 8 out of every 10 non-farm workers.”

In the entire service-producing sector, she said, only a few industries, such as transportation and health services, maintained a “solid” growth rate.

Hourly Earnings Unchanged

After a sizable increase in April, average hourly earnings of non-supervisory production workers were unchanged in May. That could translate into good news on the inflation front.

“One of the things that people who worry about inflation look at is production costs, in particular labor costs,” Shaber said. “The fact that earnings stabilized in May is considered favorable in terms of price trends. At least on the production cost side, there doesn’t seem to be a lot of pressure for companies to push prices up because wage costs are steady.”