Employers in the U.S. added as many jobs in May as they did the month before, showing the world’s largest economy is weathering the effects of higher taxes and government spending cuts.
Companies probably boosted payrolls by 165,000 workers last month, matching the gain in April, according to the median forecast from 69 economists surveyed by Bloomberg before a Labor Department report this week. The unemployment rate held at a four-year low of 7.5 percent, according to the survey. Other figures may show manufacturing is making little progress amid slack global growth.
The government spending cuts, known as sequestration, that began in March and the payroll-tax increase at the start of the year are projected to slow growth this quarter, putting a damper on hiring as businesses assess the damage. A slackening economy may prevent unemployment from retreating enough for the Federal Reserve to scale back stimulus any time soon.
“Employment growth is decent but not gangbusters,” said Nariman Behravesh, chief economist at IHS Inc. in Lexington, Massachusetts. “Between the federal government and the rest of the world we’re not getting a lot of help.”
Consumer spending, the largest part of the economy, fell in April as income growth stalled, a report showed last week. Household purchases dropped 0.2 percent, incomes were unchanged and prices declined by the most in more than four years, according to Commerce Department data.
Another Commerce Department report last week showed the economy grew in the face of higher taxes and reduced government spending. Gross domestic product rose at a 2.4 percent annualized rate from January through March, propelled by strength in consumer spending.
Growth will slow to a 1.6 percent pace in the second quarter as the effects of sequestration take shape, according to the median forecast of economists surveyed by Bloomberg early last month.
“The fiscal drag is a big wild card,” said Neil Dutta, head of U.S. economics at Renaissance Macro Research LLC in New York. “There aren’t any indications yet that we’re on the verge of a sustained increase in jobs. It’s a ho-hum labor market right now, kind of steady as she goes. We won’t see improvement until the third quarter.”
Job growth needs to accelerate to drive unemployment down to the 6.5 percent rate Fed policy makers want to see before they consider raising interest rates. Central bankers are buying bonds at a monthly pace of $85 billion to keep interest rates low, spur economic growth and boost hiring.
Federal Reserve Bank of Boston President Eric Rosengren and Federal Reserve Bank of Chicago President Charles Evans are among policy makers who have said they would like to see monthly payroll gains of 200,000 or more on a sustained basis before judging that the labor market has improved.
Besides hurting employment prospects, the weaker demand projected for the second quarter could slow factory activity. The Institute for Supply Management manufacturing index, due June 3, was probably unchanged at 50.7 last month, according to economists’ median estimate. Readings of 50 are the dividing line between expansion and contraction.
At the same time, the worst effects of the fiscal drag could be over. Defense contractors, for example, probably prepared for spending cuts well in advance, Dutta said.
Military contractors have outpaced the Standard & Poor’s 500 Index since budget cuts took effect. An index of the 10 biggest Pentagon suppliers has advanced 16.5 percent since spending reductions began compared with a 7.4 percent gain for the S&P 500.
One of those companies is Northrop Grumman Corp., a supplier of drones and other military equipment. Despite what President and Chief Executive Officer Wes Bush called a “challenging year,” the company is recruiting potential employees to prepare for an increase in retirements after years of reducing headcount.
“It might be a little bit of a surprise that as we look at the next number of years, despite the fact that we project some tough times from a fiscal perspective, we’re going to be hiring aggressively,” Bush said at a May 29 conference. “Our industry has a fairly large number of folks who are retirement-eligible, and history would suggest that over the next number of years we’re going to see a fairly significant number of retirements.”
A slowdown in global growth that is curbing exports is another reason manufacturing is cooling. The trade deficit widened to $41 billion in April from a three-month low of $38.8 billion in March as imports rebounded and sales overseas slackened, according to the median forecast of economists surveyed before Commerce Department figures on June 4.
Service industries, which are less influenced by demand overseas and account for almost 90 percent of the economy, are doing better than factories. The ISM’s non-manufacturing index, due from the Tempe, Arizona-based group of purchasing managers on June 5, rose to 53.5 in May from 53.1 the prior month, according to the Bloomberg survey median.
Bloomberg Survey =============================================================== Release Period Prior Median Indicator Date Value Forecast =============================================================== Construct Spending MOM% 6/3 April -1.7% 0.9% ISM Manu Index 6/3 May 50.7 50.7 Vehicle Sales Mlns 6/3 May 14.9 15.1 Trade Balance $ Blns 6/4 April -38.8 -41.0 Factory Orders MOM% 6/5 April -4.9% 1.5% ISM NonManu Index 6/5 May 53.1 53.5 Initial Claims ,000’s 6/6 1-Jun 354 345 Nonfarm Payrolls ,000’s 6/7 May 165 165 Private Payrolls ,000’s 6/7 May 176 175 Manu Payrolls ,000’s 6/7 May 0 3 Unemploy Rate % 6/7 May 7.5% 7.5% Hourly Earnings YOY% 6/7 May 1.9% 2.1% ==============================================================