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Friday, June 6, 2008

Huge US Jobless Rt Rise Takes Fed Hikes Off Table

2008.06.06 14:30:23 =DATA SNAP: Huge US Jobless Rt Rise Takes Fed Hikes Off Table

By Brian Blackstone


WASHINGTON (Dow Jones)--The U.S. employment rate posted its sharpest one-month increase in 12 years last month, suggesting U.S. consumers already facing a housing slump and soaring gasoline prices now confront growing pressure from a weakening jobs market.

The data, which included a fifth-straight drop in nonfarm employment, should take financial-market expectations of Federal Reserve rate hikes as soon as this fall off the table.

Nonfarm payrolls, which are calculated by a survey of establishments, declined 49,000 in May, the Labor Department said. The decline was broad based, including manufacturing, construction, retail trade and business services. Payrolls fell 28,000 in April and 88,000 in March. Both were revised to show slightly larger drops.

The unemployment rate, which is calculated using a separate survey of households, jumped 0.5 percentage point to 5.5%, its highest level since October 2004. According to the household survey, employment fell by 285,000 while unemployment rose by 861,000.

"The over-the-month jump in unemployment reflected additional workers who had lost their jobs as well as an upsurge in new and returning jobseekers," said Philip Jones, deputy commissioner of the Bureau of Labor Statistics. He cautioned that the household survey tends to be volatile between April and July due to an inflow of young people into the workforce.

Average hourly earnings increased $0.05, or 0.3%, to $17.94. That was up just 3.5% from a year earlier, suggesting wage costs remain under wraps. Fed officials are counting on the disinflationary slack that comes from a slowing economy to offset higher energy, food and commodity prices and the weak dollar and keep inflation in check.

"Importantly, we see little indication today of the beginnings of a 1970s-style wage-price spiral, in which wages and prices chased each other ever upward," Fed chairman Ben Bernanke said Wednesday, a view supported by Friday's wage data.

Wall Street economists had expected a 60,000 decline in payrolls last month and only a 5.1% unemployment rate, according to a Dow Jones Newswires survey.

After lowering the target fed funds rate at which banks lend money to each other seven times between September and April totaling 3.25 percentage points, officials are expected to hold rates steady at least through the summer.

Prior to release of the May jobs report, financial markets had priced in a rate hike as early as the fall. Wall Street will likely scale back that forecast in light of the jobless-rate rise. However, Fed officials have signaled in recent weeks that they are unlikely to lower rates further even if the economy remains weak.

Labor markets are key to the economic outlook. Until last month, they had maintained enough resilience to support consumer spending despite big drags from the housing slump and soaring energy prices that have sapped demand for big-ticket items. For instance automobile sales have tumbled in response to record-high gasoline prices, but retailers including Wal-Mart Stores Inc. reported solid May sales, which may provide the first evidence that households are spending at least part of their tax rebate checks.

But that could change, and economists worry that households can't withstand the mix of falling employment and soaring prices for food and energy much longer, especially if labor markets weaken.

According to Friday's report, hiring last month in goods-producing industries fell 57,000. Within this group, manufacturing firms cut 26,000 jobs. The sector has lost jobs every month for almost two years.

Construction employment was down by 34,000, the 11th-straight drop.

Service-sector employment rose just 8,000 in May. Business and professional services companies shed 39,000 jobs, and the financial sector lost 1,000. Retail trade shed 27,100 payrolls, the sixth-straight decline.

Temporary employment, which economists consider a leading indicator for future job trends, fell by 30,000.

Continuing a recent trend, job gains were concentrated in personal services, which tend to be more labor intensive than manufacturing and other services. Education and health services employment rose 54,000. Leisure and hospitality businesses created 12,000 new jobs. The government added 17,000 jobs.

The average workweek was unchanged at 33.7 hours. A separate index of aggregate weekly hours fell slightly.

-By Brian Blackstone; Dow Jones Newswires; 202-828-3397; brian.blackstone@dowjones.com

(END) Dow Jones Newswires

June 06, 2008 08:30 ET (12:30 GMT)

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