Weak Job Growth Raises Concerns

Weak job creation in May left little doubt Friday that the U.S. economy was downshifting, fueling questions about whether the Federal Reserve can stop raising interest rates in time to avoid a more serious slowdown.

The Labor Department’s report of a net gain of 75,000 jobs last month -- less than half of what was expected -- was the strongest sign yet that expensive gasoline and tighter credit were curbing economic growth, analysts said.

Although no mainstream economists raised the dreaded “R-word” -- recession -- as an immediate possibility, they generally agreed that the latest job report was worrisome.

“The slowdown is in place,” wrote John Silvia, an economist at Wachovia Corp. “How much and how rapid remains an issue.”

The Fed’s task now is to guide the economy to a “soft landing”: slower, noninflationary growth without recession. But that’s easier said than done. Where the Fed succeeded in 1994-95, facilitating a recovery that lasted almost the entire 1990s, more often than not the central bank has overshot. The last two recessions, in 1990-91 and 2001, came after Fed rate hike programs.

Giving rate hikes the summer off -- at the least -- was viewed by many analysts Friday as the best way to avoid sending growth into a tailspin. The Fed’s next rate-setting meeting is June 28-29, and speculators in the futures market increased their bets Friday for a possible rate pause then.

“There is now a growing body of evidence -- especially among leading indicators -- that a meaningful economic slowdown is underway and this will finally cause the Fed to hold” its benchmark short-term rate at 5%, said Bernard Baumohl, executive director of Economic Outlook Group.

“Indeed, they may keep it at this level the rest of the year.”

The yield on the 10-year Treasury note Friday fell to 4.99%, below the Fed’s benchmark short-term rate of 5%, an indication that bond investors share the view that the economy is cooling and that the Fed is nearly done raising rates.

“The economy is slowing fast,” said Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd.

“A few more months of payrolls like this and the unemployment rate will start slowly to rise,” Shepherdson said. “In the past, that has always been a signal to ease” credit.

But if the upcoming consumer price report for May, to be released June 14, contains worrisome inflation news, the Fed could decide to further tighten credit, some economists suggested.

UCLA Anderson Forecast Director Edward Leamer said all the speculation about what the central bank and its new chairman, Ben S. Bernanke, should do about rates was folly because of a real estate slowdown that was well underway.

“I don’t think the Fed, at this point, has much control,” Leamer said.

“We have a sick sector, the housing sector, and there’s not a whole lot of medicine the Fed can provide.”

Leamer’s group sees declining home sales contributing to a broad economic slowdown that bottoms out at 2% growth and stays there for at least a couple of years.

“It’s been a drunken party for several years,” he said. “Now, we have to deal with the hangover.”

Analyst Baumohl was a bit more optimistic, seeing growth slowing to 2.75% this quarter and remaining at 2% to 3% for the rest of the year.

Growth of about 3% is seen as normal for a recovery, but the economy expanded at a sizzling 5.3% in the first quarter after slogging at a 1.7% pace in last year’s final three months.

Among other signs of a slowing economy, the Commerce Department said Friday that factory orders declined 1.8% in April.

The government also revised employment gains for March and April downward by a total of 37,000 positions.

The May gain of 75,000 fell far short of expectations for a 170,000 increase and the roughly 150,000 jobs needed monthly to keep pace with growth in the labor force.

The May unemployment rate improved to a post-recession low of 4.6% from 4.7% in April. But economists said that decline was not indicative of a tightening labor market, because it was accompanied by marginal wage growth of 0.1%, less than the 0.2% expected by economists.

The effects of previous Fed rate hikes were evident in the May job report. Construction job growth of only 1,000 positions was seen as a reflection of the decline in housing orders triggered by rising mortgage rates.

High energy prices also were evident, especially in the retail sector, which shed a net 27,000 jobs in May after dropping 43,500 in April.

The trend suggested that stores were pulling back as gasoline prices pinched consumer spending.

Republican leaders put a bright face on the latest job data.

President Bush said the low unemployment rate showed that “the American economy is powerful ... and it is prosperous and we intend to keep it that way.”

But Democrats bemoaned slow wage growth.

“This economy is known as the wageless recovery,” Rep. Rahm Emanuel (D-Ill.) said. With gasoline and other prices rising, “America’s middle-class families deserve better.”

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Times staff writer Joel Havemann in Washington contributed to this report.