Jobs: Cause for Pause?

June 2, 2006 — -- The Bureau of Labor Statistics reports that the nation's job market was rather weak during May, as only 75,000 Americans found new jobs. That's below economists' expectations of 175,000 jobs, and also below the two-year average monthly growth of 157,000 jobs.

Add to that the downward revisions of the March and April numbers (subtracting an additional 37,000 jobs from previous reports), and you can see a pronounced downtrend in hiring since February.

But the picture is more mixed than that. The unemployment rate went down a 10th of a percent to 4.6 percent last month, its lowest level since July 2001. The move is within the report's margin of error and is the result of a separate survey other than the payroll report.

So, is this good or bad? The stock market is likely to rally on today's weak payrolls report because it offers traders a hint that the Fed might stop raising interest rates at their June meeting.

The weaker-than-expected hiring results could give the Federal Reserve governors cause to pause for the first time in their two-year rate-hiking spree. Central bankers raise rates to try to cool economic growth (5.3 percent in the first quarter of 2006) and defuse inflation pressure. Weaker hiring is a good indication that employers are betting on a slowdown in the immediate future. It's possible the Fed could stop after 16 quarter-point rate hikes.

Expect the markets to rally today on the news.

Manufacturing continues to be an area of weakness for the economy, shedding 14,000 jobs during the month. Construction, which had been a big area for adding jobs, was essentially flat during May (+1,000). Retailers had a lackluster month for hiring, losing 27,000 jobs thanks to weakness at grocers, clothing stores and department stores. The movie industry seems to be cutting back for the summer, reporting a reduction of a little more than 11,000 jobs during May.

The bright spots are the same as they were in previous months: finance and insurance (+9,000), education (+19,000), health care (+19,000) and restaurants/bars (+10,000).