Economy adds disappointing 138K jobs, unemployment falls to 16-year low

Paul Davidson | USA TODAY

Show Caption Hide Caption Jobs data comes in lower-than-expected; Stock sectors to focus on The economy created only 138,000 jobs in May, missing estimates of 185,000. Joe Seydl, capital markets economist at J.P. Morgan Private Bank said he's still telling clients to focus on the technology, energy and health care sectors.

Hiring slowed substantially in May as employers added 138,000 jobs, but the disappointing showing probably won’t stop the Federal Reserve from raising interest rates this month.

The unemployment rate, which is calculated from a different survey, fell from 4.4% to 4.3%, the lowest since May 2001, the Labor Department said Friday.

Economists surveyed by Bloomberg expected 180,000 job gains.

Average hourly wages rose 4 cents to $26.22, holding annual gains steady at 2.5%. Although earnings have picked up the past year or two from a tepid 2% pace, the annual increases have moderated in recent months from nearly 3%. Economists expected the low jobless rate and smaller pool of available workers to push up pay increases more rapidly, a development the Fed seeks to help underpin its plan for two more rate hikes in 2017.

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Businesses added 147,000 jobs. Federal, state and local governments lost 9,000.

Also discouraging is that job gains for March and April were revised down by 66,000. March’s was revised to 50,000 from 79,000 and April’s to 174,000 from 211,000.

A positive sign: A broader measure of joblessness — that includes discouraged Americans on the sidelines and part-time workers who prefer full-time jobs as well as the unemployed — fell to 8.4% from 8.6%. That means the shadow labor force that has allowed employers to increase pay modestly continues to shrink. Employers added 13,000 temporary workers in a signal they may soon hire more permanent staffers.

The labor market was largely expected to return to form last month after volatile weather made for sharp gyrations the first five months of the year. Mild temperatures pulled forward hiring to January and February, particularly in industries such as construction and leisure and hospitality. That, along with cold and snowy weather, led to a sharp retreat in March, which, in turn, left some pent-up demand that lifted hiring in April.

Several economists said the weather effects played out by May, so job growth was expected to roughly hew to its most recent three-month average of 174,000. Jim O’Sullivan, chief U.S. economist of High Frequency Economics, noted that seasonal adjustments can be especially tricky in May, prompting him to forecast 140,000 employment gains. The dip, he said, would not reflect the fundamentally sturdy job landscape.

Economists said it was unlikely that even sluggish hiring in May would keep the Fed from raising its key short-term interest rate by a quarter of a percentage point at a meeting in mid-June. Fed officials approved similar hikes in December and March after hoisting rates just once the previous decade. Many analysts expect the economy to grow at a healthy 3% annual rate in the current quarter after meager 1.2% growth the first three months of the year.

"We expect Fed officials will generally also dismiss the weakness as mainly due to volatility," O'Sullivan said.

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Jason Schenker, president of Prestige Economics, said the pullback in hiring the past three months — when monthly payroll gains averaged 121,000 — may reflect a slowdown in the economy that can be seen in weaker auto sales and tighter consumer credit. That, he said, could give Fed officials pause as they weigh a rate hike in June. "Maybe the job market is slowing down, too, " he said.

A counterargument is that average monthly job growth is likely to slow to about 170,000 this year from 180,000 last year and 226,000 in 2015. That’s because employers are struggling to find available workers now that the unemployment rate is near rock-bottom. Even about 100,000 payroll additions a month would be enough to further nudge down the jobless rate, and the tight market is likely to push up measured wage growth, juicing spending and the economy.

Most other indicators have shown no slowdown in hiring. Payroll processor ADP estimated that businesses added 253,000 jobs last month. Initial jobless claims, a gauge of layoffs, have hovered near 40-year lows.

The retail industry has shed 50,000 jobs the past three months as brick-and-mortar stores shutter amid a shift to online shopping. Goldman Sachs said the trend will continue to reduce monthly job gains by about 10,000.

Retailers shed about 6,000 jobs in May, while manufacturers cut 1,000.

Professional and business services led the payroll gains, with 38,000. Health care added 32,000 jobs; leisure and hospitality, 31,000; and construction, 11,000. Mining and logging, which includes oil and natural gas producers, added 6,000 jobs as the industry stabilizes amid recovering prices.