June 3 (Bloomberg) -- Payrolls grew at the slowest pace in eight months and the U.S. jobless rate unexpectedly climbed to 9.1 percent in May, reinforcing signs that a slowdown in the world’s largest economy is persisting into the second quarter.
Employers added a less-than-projected 54,000 jobs last month, after a revised 232,000 gain in April that was smaller than initially estimated, Labor Department figures showed today in Washington. The median forecast in a Bloomberg News survey called for payrolls to rise 165,000. The jobless rate climbed to the highest level this year from 9 percent a month earlier.
Stocks fell on concern that a weaker job market will hurt the confidence of consumers, whose spending makes up 70 percent of the economy, negating a decline in gasoline prices. The figures raise the odds the Federal Reserve will keep its benchmark interest rate near zero into next year, while also posing a challenge to President Barack Obama, whose re-election prospects hinge on pushing the jobless rate lower.
“These are pretty bleak numbers,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who projected a 75,000 gain in May employment. “Some of the engines of hiring just went away.”
Stocks trimmed losses after another report today showed that service industries expanded more than forecast in May. The Standard & Poor’s 500 Index dropped 0.5 percent to 1,306.57 at 12:14 p.m. in New York after falling as much as 1.2 percent. The yield on the benchmark 10-year Treasury note fell to 3 percent from 3.03 percent late yesterday.
The Institute for Supply Management today said its index of non-manufacturing businesses increased to 54.6 in May from 52.8 a month earlier. The median estimate of 74 economists surveyed by Bloomberg projected the measure would rise to 54. A reading above 50 signals expansion.
Factories cut payrolls in May for the first time in seven months, the Labor Department said, partly reflecting a drop at motor vehicles and parts producers that may have been related to a components shortage after the earthquake in Japan. Employment at retailers, leisure and hospitality companies and state and local governments also decreased.
Economists at Barclays Capital Inc. today cut their forecast for second-quarter economic growth to a 2 percent annual rate from a prior estimate of 3.5 percent. They also lowered the projection for the third quarter to 3 percent from 3.5 percent.
“The surge in headline inflation over the December-April period has clearly hurt consumer purchasing power and consumer spending,” Barclays Capital spokesman Seth Martin said in an e- mailed statement.
Wave of Data
Today’s report makes it more likely the Fed will signal that it will keep its balance sheet at a record to spur the economy after ending $600 billion in bond purchases this month, a policy known as QE2 for the second round of quantitative easing. Central bankers next meet June 21-22.
“This really suggests everything will be on hold longer for the Fed,” said John Silvia, Wells Fargo Securities LLC’s chief economist in Charlotte, North Carolina. “I can’t imagine they would be shrinking the balance sheet after finishing QE2 given all the uncertainties. They are on caution alert at this point. We are not creating jobs.”
Companies still reducing their workforce include H.J. Heinz Co., the world’s biggest ketchup maker, which in May announced plans to slash as many as 1,000 jobs worldwide and close five factories. Dean Foods Co., the largest U.S. milk processor, said it cut 600 positions last quarter and 140 early this quarter.
Austan Goolsbee, Obama’s chief economist, said the jobs report represents a “little bump” in the road to recovery and that the broader trends are “substantially more positive” than when Obama took office in January 2009.
“We should never read too much into any one month’s report,” Goolsbee, chairman of the Council of Economic Advisers, said in an interview on Bloomberg Television. “No doubt we face some headwinds.”
Employment and economic growth may bounce back as disruptions of parts supplies caused by the Japan earthquake and tsunami ease, said David Resler, chief economist at Nomura Securities International Inc. in New York.
“Supply-chain disruptions from the earthquake in Japan are affecting the auto and related industries,” he said. “There is a bit of a slowdown which we think is going to be temporary.”
Consumers are also getting some relief from a drop in gasoline prices. Consumer confidence rose for a second week in the period ended May 29, the Bloomberg Consumer Comfort Index showed yesterday.
“Job creation remains the most important factor during the economic recovery, but we do anticipate that it’s continuing to improve,” Don Johnson, vice president of U.S. sales at General Motors Co., said on a June 1 teleconference. “The environment for future hiring and investment does continue to be positive.”
Economic growth slipped to a 1.8 percent annual pace in the first three months of the year from 3.1 percent in the prior quarter, revised figures from the Commerce Department showed last week. Today’s report caps a raft of data pointing to an extended slowdown.
Manufacturing grew in May at the slowest pace in more than a year, according to Institute for Supply Management data this week, reinforcing concern the industry that led the U.S. recovery is cooling.
Home prices in 20 U.S. cities dropped in March to the lowest level since 2003, figures from the S&P/Case-Shiller index showed on May 31. Consumer spending grew less than forecast in April as households felt the pinch of grocery and energy costs, a Commerce Department report showed.
“The current accommodative stance of U.S. monetary policy continues to be appropriate because the unemployment rate remains elevated and inflation is expected to remain subdued over the medium run,” Fed Vice Chairman Janet Yellen said in a Tokyo speech this week.
Factory payrolls decreased by 5,000 in May, compared with the survey forecast of a 10,000 increase and following a 24,000 gain in April, today’s report showed.
Private hiring, which excludes government agencies, rose 83,000 last month. Private payrolls increased 251,000 in April, initially reported as a gain of 268,000.
Government payrolls decreased by 29,000, reflecting reduced employment at state and local governments. Employment at service-providers increased 51,000. Construction companies added 2,000 workers and retailers cut 5,000 jobs.
Average hourly earnings rose 0.3 percent to $22.98 in May, while the average workweek held at 34.4 hours, today’s report showed.
The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- was little changed at 15.8 percent after 15.9 percent in April.
The report also showed an increase in long-term unemployed Americans. The number of people unemployed for 27 weeks or more rose as a percentage of all jobless, to 45.1 percent from 43.4 percent.
--With assistance from Chris Middleton, Tim Homan, Bob Willis and Mike Dorning in Washington. Editors: Vince Golle, Christopher Wellisz
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