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U.S. economy creates an anemic 38,000 jobs in May, likely stalling Fed interest rate hike

la-fi-jobs-report-story-level 2016 2016 2015 2015 Unemployment rate Net job gains May 2015 5.5% May 2016 4.7% May 2016 38,000 (In thousands) Source: U.S. Department of Labor @latimesgraphics May jobs report 0 2 4 6% M A M F J D B O S A J J M 0 100 200 300 M A M F J D B O S A J J M

Job growth ground nearly to a halt in May, with the U.S. labor market having its worst performance in more than five years, the Labor Department said Friday.

The economy added just 38,000 net new jobs last month, a steep falloff from April’s disappointing 123,000 and well below analysts’ forecasts. The huge decline in job creation makes it unlikely Federal Reserve policymakers will increase a key interest rate when they meet to assess the state of the economy later this month.

“Going into the payroll number, it was clear that unless the jobs report was horrible the Fed was going to hike in either June or July,” said Steve Ricchiuto, chief economist at Mizuho Securities. “This now assures that June is off the table but may not rule out July.”

The Labor Department also said Friday that there were 59,000 fewer jobs created in March and April than previously estimated. That means the economy has averaged just 116,000 during the previous three months, compared with about 207,000 last year.

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The unemployment rate fell to 4.7% in May, the lowest since 2007. But that was largely because 458,000 workers dropped out of the labor force, the second straight large monthly decline. The percentage of working-age Americans in the labor force dropped to 62.6%, near a four-decade low.

One bright spot was that wages continued to show solid improvement. Average hourly earnings increased 5 cents in May to $25.59, although that was less than the 9-cent increase the previous month.

For the 12 months ending May 31, average hourly earnings increased 2.5%.

Several key economic sectors reduced payrolls last month. Construction shed 15,000 net jobs, mining 11,000 and manufacturing 10,000.

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There were 34,000 fewer employees in the information industry in May, although that was largely attributed to a strike by Verizon workers.

Economists had warned that last month’s jobs figure would be artificially low because of the strike by about 35,000 Verizon workers in 11 states that began in April and did not end until last week. The Labor Department did not count the striking workers on employers’ payrolls in May, although that would be partially offset by the hiring of some temporary workers to take their place.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the job growth was “startlingly weak” even after taking into account the effect of the Verizon strike.

But he said he was inclined to see the slowdown in hiring in April and May as a delayed reaction to the financial market turmoil at the start of the year.

“The good news is that it should not last,” Shepherdson said of the poor job growth.

Analysts had expected job growth of about 158,000 in May with unemployment ticking down to 4.9%.

Fed policymakers are scheduled to meet June 14-15 to decide if the economy is strong enough for another small hike in their benchmark short-term interest rate. Labor market conditions are key to that determination.

The federal funds rate was increased by 0.25 percentage points in December after seven years of sitting near zero in an attempt to boost the recovery. In recent days, central bank policymakers have said they expected another rate hike soon.

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Last week, Fed Chairwoman Janet L. Yellen said continued economic improvement would make it appropriate to “gradually and cautiously” raise the rate, “probably in the coming months.”

But May’s meager job growth was completely unexpected and puts a June rate hike in serious doubt, analysts said.

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UPDATES:

6:34 a.m.: This article has been updated with staff reporting. 

5:53 a.m.: This article was updated throughout with additional details and background. 

5:39 a.m.: This article has been updated with the latest Labor Department figures.

This article was originally published at 4:57 a.m.


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