The U.S. job market slowed dramatically in May, according to government data released Friday, adding just 38,000 jobs despite other signs that the economy was picking up steam after a weak start to the year.
In addition, the unemployment rate fell from 5 percent to 4.7 percent. However, the decline was primarily due to a contraction in the labor force, rather than workers finding jobs.
“This just does not square with all the other things we’re seeing in the economy,” said Gus Faucher, chief economist at PNC Financial Services Group. “This is no reason to panic, and I still think the fundamentals remain solid.”
Estimates of overall economic growth this spring range from 2.5 percent to 3 percent, substantially higher than the 0.8 percent pace this winter as the slowdown in China, plunging oil prices and a strong dollar crimped exports and business investment and rattled financial markets around the globe. The United States' recovery appears to have pulled through the turmoil, but the disappointing jobs report suggests it was left with some scars.
White House officials cited several bright spots in the report: Average hourly earnings rose 5 cents to $25.59 in May and are up 2.5 percent over the past year. The long-term unemployment rate fell to 1.2 percent, the lowest level since August 2008. And employers are still hiring, even if at a slower pace, extending the longest streak of job creation in the nation’s history.
“When you look at the totality of the circumstances here, I have a lot of confidence that we still have the wind at our back,” Labor Secretary Thomas E. Perez said in an interview.
Still, that could sway the timing of the Federal Reserve’s next hike in interest rates. The nation’s central bank began pulling back its support for the economy at the end of last year when it raised rates for the first time in nearly a decade. Officials will meet later this month to debate whether to do so again.
The slowdown in hiring could bolster the case for waiting. The decision was already a close call because of the upcoming vote in Britain over whether to remain in the European Union, referred to as the "Brexit." The uncertainty over the referendum — three weeks away — has already caused sharp swings in the British pound, and investors are bracing themselves for volatility in the run-up to the vote. If Britain does opt out of the 28-nation club, the move could spark political contagion across Europe and cause major disruptions in trade and financial markets.
Over the past two days, key Fed officials have begun to question whether another hike is necessary soon. In a speech Friday afternoon at the Council on Foreign Relations, Fed Gov. Lael Brainard said she would like to see more evidence that the recovery remains sound. In addition to the Brexit, she pointed to ongoing concerns over growth in China and emerging markets.
“There would appear to be an advantage to waiting until developments provide greater confidence,” she said.
That assessment echoed comments by Fed Gov. Daniel Tarullo on Bloomberg TV on Thursday and Chicago Fed President Charles Evans in London on Friday. Tarullo said he is looking for an “affirmative reason to move.” Evans said he believes the U.S. recovery still faces substantial risks, including unexpected strength in the dollar and a turbulence in financial markets that force businesses and consumers to rein in their spending. At the same time, inflation has been running below the Fed’s target of 2 percent.
Evans suggested the central bank may need to wait until inflation hits the Fed’s goal before raising rates and argued that it has few tools to counter another economic slump. The central bank will also meet in July and September.
“Policy is much better positioned to counter unexpected strength than to address downside shocks,” Evans said.
Economists have been warning that job growth would likely slow as the labor market healed. The unemployment rate has now fallen by more than half since peaking at 10 percent following the recession. Only about 100,000 jobs need to be added each month to hold the jobless rate steady, compared to about 200,000 a few years ago.
Yet Friday’s report fell far short of that lower bar, and analysts had been anticipating solid growth of 160,000 jobs. Part of the miss was due to 35,000 Verizon workers who were on strike when the government was compiling its numbers. But the real culprit was simply a lack of desire among employers for new workers.
Professional and business services added just 10,000 jobs last month after bringing on 55,000 in April. Retail, a stalwart of growth, was flat. The mining and manufacturing industries together shed 21,000 jobs. Meanwhile, there was a jump in the number of people working part time who would prefer full-time jobs.
“In the words of a wise old economist, the numbers are what the numbers are,” said Richard Moody, chief economist at Regions Financial. “The problem today is we simply do not know what to make of them.”