Jobless Rate Jumps in May

While job losses were in line with Wall Street expectations, a surprise spike in the unemployment rate to 5.5% spooked stock and bond markets

By BusinessWeek, Standard & Poor's, and Action Economics staff

While Wall Street economists were forecasting that the U.S. economy would post a modest number of job losses in May, they didn't expect an upward spike in the unemployment rate. Yet that's what happened on June 6, and the news whipsawed U.S. financial markets. Stocks tumbled, with the Dow Jones industrial average down 203 points, or 1.6%, to 12,401 at just after 10 a.m. ET. Treasury prices, meanwhile, moved higher as sources cited by Action Economics said money is again flowing out of stocks and back into the safety of shorter-dated Treasuries.

U.S. nonfarm payrolls fell 49,000 in May, in line with market expectations. Both April and May were downwardly revised to -28,000 and -88,000, respectively (from -20,000 and -81,000 previously). Payrolls have fallen for five straight months.

Biggest Rate Climb in 22 Years

The shocker in the report was that the unemployment rate jumped to 5.5% from 5.0% in April, well above the 5.1% expected. That represented the biggest rise since February, 1986. Household employment fell 285,000 after a 362,000 rise in April, while the civilian labor force surged 577,000.

"While the drop in payrolls was as expected, it continues to indicate a weak jobs market," wrote Standard & Poor's senior economist Beth Ann Bovino in a June 6 note. "Together with the big jump in the unemployment rate, the report may put downward pressure on stock prices and bond yields today."

"The markets will focus on the big jump in the unemployment rate (even if it might overstate the erosion in the labor market)," wrote Action Economics analysts in a June 6 Web posting.

Elsewhere in the report, average hourly earnings rose 0.3% and the average hourly workweek was steady at 33.7. Manufacturing and construction payrolls lost an additional 26,000 and 34,000 jobs, respectively. Service-producing jobs gained 8,000, but business services lost 39,000.

"The May labor report offers something of a mixed bag for markets, but in general it has a weak tone," wrote London-based ING Bank (ING) economist James Knightly in a June 6 note. He expects the labor market will continue to weaken given the upward trend in initial and continuing jobless claims and softness in other labor-market indicators.

Knightly says this is bad news for the household sector, which is already having to cope with negative real-wage growth, falling house prices and more expensive borrowing. "This will continue to depress consumer spending (the fiscal package is being fully swallowed by higher gasoline prices) and will, in our view, help to keep activity depressed for longer than financial markets are currently discounting," he wrote.

What are the implications of the report for the Federal Reserve? Fed funds futures, a vehicle for market pros to bet on the future direction of interest rates, rebounded higher after the May jobs report, reports Action Economics. "Nevertheless, implied Fed funds remain priced for a steady Fed policy stance through the summer and fall, but continue to reflect better than 50-50 risk for a [quarter-point] rate hike by yearend," wrote Action Economics.

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