Weak U.S. Job Growth in May Renews Fears

The U.S. economy added a net 78,000 jobs in May, the lowest monthly total in nearly two years, the government said in a report that rekindled fears of a slowing economic recovery.

But a separate government survey pegged the unemployment rate for May at 5.1%, down from 5.2% the previous month and its lowest level since September 2001.

As a result, analysts were far from ready to say last rites for the recovery, and many predicted that the Federal Reserve would stick to its inflation-fighting interest rate hikes through much or all of this year.

Economists were surprised that the economy generated so few jobs in May. Their consensus had looked for 175,000 new jobs, more than double the actual number. Further, job creation in March was revised downward to 122,000 jobs from 146,000.

But many analysts pointed out that the weak job creation in May mostly offset a spurt of 274,000 new jobs in April. The monthly average of 176,000 over the two months was close to last year’s 183,000.

“You need to look through the one-month average to the longer term,” said Maury Harris, chief U.S. economist for UBS.

“It was a weak report all around, but it’s got to be taken in context with last month’s,” said Scott Anderson, senior economist at Wells Fargo Bank in Minneapolis.

At the same time, he said, the two-month average of 176,000 “is nothing to get too excited about.” In the second half of the 1990s, monthly job increases of more than 300,000 were common.

Even before the job report, the newest member of the Federal Reserve’s policymaking Open Market Committee had suggested that the Fed’s policy of raising short-term interest rates -- which it has done eight times in the last 12 months -- might be drawing to an end.

“We’ve gone through eight innings here,” Richard Fisher, who became chairman of the Dallas regional Fed bank in April, told the Wall Street Journal. “The next meeting in June is the ninth inning. We’ll take a look after that. We may have to go into extra innings in this contest against inflation.”

But a consensus of economists held that the Fed would stick to its guns for most or all of 2005. If it continued to raise rates by one-quarter of a percentage point at each of its five remaining policy meetings this year, that would push its benchmark short-term rate -- which was at an historically low 1% a year ago -- from 3% today to 4.25%.

Some economists, however, think that the Fed might skip one or two hikes, perhaps stopping at 3.5% or 3.75%. The next meeting is on June 29 and 30.

Anderson pointed out that at 3%, the federal funds rate -- the interest rate that banks charge each other for overnight loans -- was barely outpacing inflation. This rate, the only one directly controlled by the Fed, has historically averaged about 2 percentage points more than inflation, he said, and it will have to grow at least to 4% before reaching that level.

“The Fed’s going to remain focused on the potential for further inflation,” Anderson said.

Some analysts even held out the specter of the sort of wage-price spiral that brought the economy to its knees in the 1970s.

Ian Shepherdson, chief U.S. economist for High Frequency Economics in Valhalla, N.Y., said Americans’ hourly earnings rose at a 3.1% annual rate in the last three months, the fastest such increase in eight months. At the same time, he said, productivity is slowing, putting further upward pressure on the prices of goods and services.

Fed Chairman Alan Greenspan “faces a dilemma,” Shepherdson said. “We think he keeps hiking.”

However, average hourly earnings in May rose 0.2% to $16.03 an hour, down from a 0.3% jump in the previous month.

Politicians interpreted the job report to their own purposes. Treasury Secretary John W. Snow said it showed that under President Bush’s guidance, “the economy keeps moving in the right direction.”

Republican and Democratic leaders of the House drew apparently contradictory lessons from the report. House Speaker J. Dennis Hastert (R-Ill.) said, “More Americans are working today than at any other time in our nation’s history.”

Democratic leader Nancy Pelosi of San Francisco countered, “Today’s anemic jobs numbers confirm that Bush has failed to create a single new private-sector job.”

Both Hastert and Pelosi were technically correct. The 133.3 million total jobs in May exceeded the high-water mark before the 2001 recession of 132.5 million in the first two full months of Bush’s presidency. But government jobs were responsible; total private-sector jobs of 111.6 million last month fell 24,000 short of the number in January 2001, when Bush took office.

The long-suffering manufacturing sector took another hit in May, losing 7,000 jobs. Only 1 American job in 9 was in manufacturing in May.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, said only construction and healthcare showed vigorous job creation in May.

Construction added a net 20,000 jobs, all on the residential side, and has accounted for 14% of job growth over the last year even though it accounts for only about 5% of all jobs. Low mortgage rates have propelled a boom in housing. Healthcare contributed a net 26,000 jobs.

Also Friday, the Institute for Supply Management said its index measuring the service sector fell to 58.5 last month from 61.7 in April. Any number above 50 indicates growth in that sector, which accounts for two-thirds of the overall U.S. economy.