Jobless Rate Jumps to 4.1%

Updated from 9:50 a.m. EDT

The U.S. unemployment rate rose to 4.1% in May as the nation's employers hired surprisingly few workers and curbed wage increases, indicating that the booming labor market, which has underpinned the country's stunning economic performance in recent years, may be starting to feel the sting of higher interest rates.

The Labor Department reported Friday that nonfarm payrolls, a broad measure of employers' new hires, rose a far-smaller-than-expected 231,000 in May, and the unemployment rate rose to 4.1%. That compares with an upwardly revised gain of 414,000 payrolls in April, which brought the unemployment rate for that month to a 30-year low of 3.9%.

The data shocked many economists, who had not expected to see such a swift skid in the labor market. The consensus of analysts polled by Reuters had forecast a 386,000 rise in payrolls and no change in April's 3.9% unemployment rate.

Although labor markets remain extremely strong by historical standards, the sharp slowdown in May is a sign that a yearlong campaign by the Federal Reserve to raise interest rates in an attempt to slow growth is finally beginning to rattle the foundations of the record-long U.S. economic boom.

A separate government report also pointed to more sluggish economic activity Friday. The Commerce Department reported that factory orders dropped 4.3% in April following an upwardly revised 2.7% rise in March.

The jobs data, along with other data showing slower retail and auto sales, shrinking home sales activity and diminishing growth in manufacturing, suggest that the economy might finally be showing broad signs of slowing.

The slower pace of hiring in May came despite a recent spate of 357,000 temporary hires for the government's Census 2000 effort. Stripped of census workers, payrolls actually declined by 126,000 in May.

Employees also worked fewer hours, indicating that business activity for many companies may be slowing. Labor reported that the number of hours worked by the average employee dropped by six minutes to 34.4 hours.

With such paltry gains in payrolls, employers were also not inclined to raise wages and salaries as quickly as they recently have. The report's measure of average hourly earnings rose only a penny, or about 0.1%, to $13.65 in May. That pulled year-over-year wage growth down to 3.5% from 3.8% in April. Economists had expected a 0.4% rise in wages.

That is sure to ease the minds of economists and policymakers, who have repeatedly voiced concerns that the hot labor market, and its upward pressure on wages, was fueling unsustainable levels of consumer demand. They also fear that higher wages would cause companies to push the costs along to their customers, causing inflation to jump higher.

Ofsetting the throngs of workers hired for the Census was a sharp and broadly-based 116,000 cut in private sector payrolls. That contraction included a 67,000 decline in retail jobs, 29,000 drop in construction jobs, and 17,000 manufacturing jobs.

The major areas that declined in May -- construction, manufacturing, and retail -- indicate that any degree of slowdown in the economy is hurting low-skill workers the most.

"Most of the slight unemployment rise during the month was among less educated workers and underscores the need for education and training to meet our economy's continuing demand for skilled workers," said Labor Secretary Alexis M. Herman in a statement. "Skills are the ticket for the new economy."

Financial markets took comfort in the weak labor report, as it suggests the Fed might not have to keep increasing interest rates as much as previously thought. The Fed has raised short-term interest rates, which act as a basis for everything from credit cards to mortgages, six times since last June in an attempt to slow economic growth. Its last rate move on May 16, doubled in magnitude from the previous five, to half a percentage point.

"From the Fed's point of view, this is a perfect jobs report," said Bill Cheney, chief economist John Hancock Financial Services. "Job growth slowed significantly and there are absolutely no signs of inflation."

The breadth of the slowdown for labor markets and other key areas of the economy is helping to convince many economists that the Fed might stand pat on interest rates when it meets next on June 27 and 28.

"These figures are consistent with our view that the Fed will remain on hold at this month's June 28 (Fed policymaker) meeting," said Joe LaVorgna, senior U.S. economist at Deutsche Bank in New York.

But he also cautioned that the slowdown might not mean the end of the Fed's vigilant inflation-fighting rate moves. Despite the May labor market weakness, he noted that second-quarter gross domestic product still appears to be running higher than historical trends at around 4%. The weakness, he said, could be a "headfake" as many leading indicators of the labor market, like unemployment claims and businesses' hiring plans, continue to point to a healthy labor market going forward.

But other parts of the economy are convincingly showing slower activity, including the May factory orders data. The report showed a wide decline in orders, even when volatile transportation orders and defense-related orders were stripped out. That adds to the recent signs that home sales, durable goods orders, manufacturing are starting to react to the Fed's rate increases.

Some pockets of the economy, however, are likely to continue chugging along, especially in the high-tech arena. The Semiconductor Industry Association reported Thursday that sales of semiconductors grew 35.6% year over year in April to $11.2 billion. The trade group cited growing demand for mobile phones and wireless electronic devices as the main driver of that growth.