Jobless Rate Increases to 4.5 Percent

By Nell Henderson and Howard Schneider
Washington Post Staff Writers
Saturday, May 5, 2007

Unemployment edged up to 4.5 percent last month and job growth cooled, the government reported yesterday, showing how sluggish economic growth is starting to loosen the nation's tight labor market.

Financial markets showed little reaction to the weak numbers, since the jobless rate remains low by historical standards. Also, many analysts, including those at the Federal Reserve, expect unemployment to creep to a level closer to 5 percent this year. That would fit with moderate economic growth, not a sharper downturn.

The Labor Department report will likely reassure Fed policymakers, who have worried that a tight job market might fuel higher inflation and are counting on a modest increase in unemployment to help cool price pressures.

If the economy follows the Fed's forecast and expands at a moderate pace, the central bank is likely to hold its key short-term interest rate steady at 5.25 percent at its meeting Wednesday and perhaps for the rest of the year.

"I would not view this as the forerunner of a recession," Nigel Gault, North American macroeconomics group manager at Global Insight, said of the Labor figures. "In a sense, this is the last piece of the slowdown . . . and the puzzle up to now has been why hasn't the labor market softened."

But other analysts cautioned that a weakening labor market would make it harder for many households to pay their bills at a time of high gasoline and food prices, falling home values and heavy debt-service costs.

"Absent considerably stronger job growth, recessionary concerns will begin to loom large," said Jared Bernstein, a senior economist at the Economic Policy Institute.

Employers have turned more cautious in their hiring, adding just 88,000 jobs in April and a modest 129,000 per month on average so far this year. That's down from last year, when job gains averaged 189,000 per month.

The shift in the employment mix reflected the strengths and weaknesses in the economy. Employers added workers in the service industries that have thrived in recent years: health care, education, law, accounting, management, hotels, the movie and recording industries. Those gains more than offset cuts in the slumping housing and domestic auto industries. Employers trimmed payrolls in real estate, residential construction, mortgage lending, furniture making and in the manufacture of wood products, motor vehicles and parts and machinery.

The unemployment rate would have been higher in April if not for the fact that hundreds of thousands of Americans dropped out of the labor force, either leaving their jobs or quitting the job search.

Wage growth also slowed. Average hourly earnings rose just 0.2 percent in April, and were up 3.7 percent from a year earlier, the smallest annual gain since last May.

But Fed policymakers worry that inflation is too high and might flare higher. And they see growing danger that the economy might weaken further if unemployment rises more than expected, prompting businesses and consumers to pullback sharply on spending.

Either of those problems would put the Fed in a bind. Raising interest rates to fight inflation might deepen the economic slowdown; cutting rates to spur growth might fan price increases.

But if the sluggishness of the first quarter persists, or worsens, the Fed might shift in June to a more neutral stance, saying it is equally concerned about inflation and growth. Then, if inflation ebbs and unemployment rises, the Fed could cut rates.

The April Labor report "certainly opens the door a little wider for a Fed cut should inflation moderate further," said Scott Anderson, senior economist at Wells Fargo.

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