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Dismal employment report dims prospect of Fed rate hike

 

Friday June 03, 2016 – The U.S. economy created the fewest number of jobs in more than 5-1/2-years in May as manufacturing and construction employment fell sharply, suggesting slippage in the labor market that could make it harder for the Federal Reserve to raise interest rates.

Nonfarm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010, the Labor Department said on Friday. Employment gains were also restrained by a month-long strike by Verizon workers, which depressed information sector payrolls by 34,000 jobs.

Underscoring the report’s weakness, employers hired 59,000 fewer workers in March and April than previously reported. While the unemployment rate fell three-tenths of a percentage point to 4.7 percent in May, the lowest level since November 2007, that was in part due to people dropping out of the labor force.

“This is not a good report, and it may well give Fed officials second thoughts about increasing interest rates again this month or next, as some have suggested lately,” said Peter¬†Ireland, an economics professor at Boston College.

The Fed has signaled its intention to raise rates soon if job gains continued and economic data remained consistent with a pickup in growth in the second quarter.

Fed Chair Yellen said last week that a rate increase would probably be appropriate in the “coming months,” if those conditions were met. The U.S. central bank hiked its benchmark overnight interest rate in December for the first time in nearly a decade.

U.S. stocks were trading lower, while prices for U.S. government debt rose. The dollar .DXY fell against a basket of currencies.

Financial markets largely priced out a rate increase at the Fed’s June 14-15 policy meeting after Friday’s data, according to CME Group’s FedWatch program. The chance of an increase in July fell to 36 percent from about 59 percent late on Thursday.

WAGE GROWTH LAGS

Economists polled by Reuters had forecast payrolls rising by 164,000 in May and the unemployment rate falling to 4.9 percent

The weak employment report bucks data on consumer spending, industrial production and housing that have suggested the economy is gathering speed after growth slowed to a 0.8 percent annualized rate in the first quarter.

In separate reports on Friday, the Commerce Department said goods exports rebounded strongly in April and orders for manufactured goods recorded their biggest gain in six months.

Some economists say the sharp slowdown in employment last month was payback after unseasonably warm weather boosted hiring in February and March. They also viewed the weak payroll growth as a delayed response to tepid first-quarter economic growth.

“Employment sometimes lags economic activity, which means the weakening trend in the first five months of this year may simply reflect the sharp slowdown in the economy in the first quarter, exacerbated in April and May by a shift of some seasonal hiring,” said Chris Low, chief economist at FTN Financial in New York.

The goods producing sector, which includes mining, manufacturing and construction, shed 36,000 jobs, the most since February 2010. Even without the Verizon strike, payrolls would have increased by a mere 72,000.

 

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