Employment Scene Is Stabilizing -- at Least for Now

The unemployment rate dipped to 4.4% in May, but more jobs were lost from the labor market than expected.
By David A. Gaffen ,

The labor market continues to deteriorate, although May wasn't as bad as some feared.

This morning's

employment report

suggests that -- at least for a month -- erosion in the job market has leveled off a bit. Job losses were about as expected in May and the

unemployment rate

, which was expected to climb, actually fell.

Unemployment dipped to 4.4% in May from 4.5% in April. It had been expected to tick up to 4.6%.

Nonfarm payrolls

dropped by 19,000 last month, a bit higher than the loss of 17,000 jobs economists on average were expecting. The manufacturing sector had the greatest loss of jobs and remains terribly depressed. That sector was hit with a double-whammy; the

purchasing managers' index for May, released this morning by the

National Association of Purchasing Management

, showed another slide. And after seemingly improving in the last couple of months, officials at NAPM said the manufacturing sector now seems to be deteriorating more rapidly.

Stocks were mixed on the news. The employment report is considered the most important monthly economic release. Investors are concerned that further deterioration in labor will cause a pullback in spending, which would continue to hurt company earnings and potentially put another dent in stocks. It's going to take more than this report, however, because the ever-optimistic equity market continues to look ahead to that much talked-about recovery.

Economists say weakness in the labor market is expected to persist for several more months. "I think perhaps the labor market will remain on the soft side until there's some firming in profitability," said John Lonski, chief economist at

Moody's Investors Service

. "But the unemployment report is not weak enough to suggest that a severe deceleration of consumer spending awaits the U.S. economy."

A steady increase in hourly wages and a recent stabilization in the number of hours employees work could offset, to some extent, the overall losses in the number of people working. Hourly wages rose 0.3% to $14.26 in May, putting them at a year-over-year increase of 4.4% and the strongest in three years. Despite the economic downturn that has socked corporate profits, consumers kept spending at a reasonable rate.

The Trend Is Not Your Friend

Other trends give economists pause, however: Weakness in the manufacturing sector, a rising number of new unemployment claims and, more disturbingly, a steady rise in the number of people

remaining

on unemployment. This latest data suggests that jobs are becoming harder to come by. And, as companies continue to cope with increased costs -- such as for energy -- and lower profitability, these labor conditions don't auger well for economic strength in the near future.

Especially in the manufacturing sector.

In May, the nation's job losses were concentrated in manufacturing, which shed 124,000 jobs. That follows a loss of 113,000 positions in April. Since last July, manufacturing has lost 675,000 jobs, with more than two-thirds of that decline occurring since December.

"People say manufacturing is just one sector, but if you're making fewer things, then you need fewer distributors and less transportation and less financing," said Carol Stone, deputy chief economist at

Nomura Securities

. "It does spill over into other sectors, and it is worth being concerned about."

Today's report hasn't changed the market's outlook in regard to the

Federal Reserve. The

fed funds futures contract, a good proxy for the market's estimation of what the Fed will do with interest rates, continues to factor in a strong chance of a 25 basis-point rate cut at its next meeting on June 26 and 27. Futures are currently factoring in a 90% chance of such a cut. Yesterday, the market was factoring in a 92% chance.

April's massive job losses -- initially estimated at 223,000 -- were revised lower, to a decline of 182,000, while March's payroll figure was actually revised to reflect a gain of 59,000 nonfarm jobs from a loss of 53,000. Seasonal adjustments to the payroll data are somewhat responsible for the turnaround in the jobs data for March. The Labor Department revised the seasonally adjusted nonfarm payroll figures going back several years, which is its usual practice.

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