By John W. Schoen Senior producer
msnbc.com
updated 6/3/2011 7:08:40 PM ET 2011-06-03T23:08:40

Policymakers, investors and economic forecasters are hoping that a sharp slowdown in economic growth last month was only a speed bump on an already bumpy road to recovery.

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Because otherwise the ride could get a whole lot rougher.

Friday's jobs numbers showed that the economy produced a meager 54,000 new jobs in May with weakness across all sectors. The data capped a week of reports pointing to a sudden, unexpected slowdown in the recovery.

Story: May employment report shows pace of job growth weakening

"It is now pretty clear that the economy ran into a brick wall last month," said Paul Ashworth, chief U.S. economist at Capital Economics.

Prior to this week most data had been pointing to a slow but steady increase in the economy's momentum. What took the wind out of the recovery's sails so suddenly, and will the doldrums last?

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On top of the list is a surge in gasoline prices that has forced consumers to tighten spending on the rest of their household budget. Job growth in the retail, leisure and hospitality industries, which had been showing healthy advances, ground to a halt last month.

Floods and deadly tornadoes shut down some businesses in the southern half of the nation last month and may have depressed the jobs count. Some analysts also pointed to a slowdown in U.S. manufacturing because of a shortage of parts as Japanese suppliers continue to rebuild after a devastating earthquake in March.

The impact of those factors should dissipate in the summer and fall. Japanese suppliers are rebuilding faster than initial estimates suggested. In the past month, oil prices have fallen from a peak of $114 a barrel to under $100. Gasoline prices are beginning to ease off too; the average pump price is down 4 percent from a peak of $3.97 a gallon just two weeks ago.

Once those forces are no longer holding back growth, many analysts believe, the economy's underlying strength will restore momentum and get the recovery and job growth back on track.

There are troubling signs, though, that the recovery faces more fundamental, long-term threats. That list begins with the failure of Congress to give the Treasury legal authority to borrow enough money to pay all the government's expenses.

Story: Why jobs no longer top Washington's agenda

On Thursday, a second major credit rating agency warned Congress and the White House that if they don't agree on a way to raise the nation's borrowing limit, the U.S. government could lose its top debt rating. Such a downgrade would likely force up interest rates and raise borrowing costs, creating a headwind strong enough to increase the risk of another recession.

"We don't have a very positive outlook for job creation in the next few months," said William Dunkelberg, chief economist at the the National Federation of Independent Businesses, whose members this week reported in a monthly survey that they're cutting back on hiring plans. "The big issue for us is confidence. We don't have any confidence in the leadership that they're going to solve this problem."

The solution itself could spell trouble. At roughly $1.5 trillion, the federal budget deficit represents about 10 percent of gross domestic product. Closing that deficit too quickly, with either deep spending cuts, tax increases or both, could send the economy back into recession. Spending cuts by cash-strapped state and local governments have already eliminated nearly 450,000 jobs since September 2008.

Vote: What do you think is causing the sluggish labor market?

In May, state and local governments cut 28,000 jobs, the most since November, while private businesses hired only 83,000 new workers.

Perhaps the biggest force holding back the recovery is the housing market, still mired in its deepest downturn since the Great Depression. There was no improvement in May, as home builders sat on the sidelines for the fifth spring since the housing market collapsed in late 2006.

"In every cycle we have come out of, construction has always been a major factor in the recovery, going back to the end of World War II and even back to the '30s," former Federal Reserve Chairman Alan Greenspan told CNBC Friday. "This is the first time when construction has not come out of this."

The collapse of the housing market has stunted job growth for several reasons. Apart from begetting jobs directly in building trades, new home construction creates related jobs in fields such as real estate sales and mortgage lending. Growth in demand for home furnishings and appliances has also been hurt.

More broadly, falling home prices are robbing American consumers of their savings and weighing on consumer confidence. Home values are in free-fall in many parts of the country as lenders struggle to unload millions of foreclosed properties by sharply cutting prices. Housing industry analysts say that the foreclosure pipeline will take several more years to clear.

Even if the latest "pause" in job growth is temporary, the pace of hiring is expected to remain painfully slow. Economists are still debating why the current recovery has been so sluggish. But nearly two years after the recession ended, the rebound is far slower than past recoveries.

"This remains a horribly weak economic recovery. We're still looking at payrolls today that show 7 million fewer jobs compared to the peak of January 2008," said John Lonski, an economist at Moody's Capital Markets Group. "Until we make more progress on the jobs front, until we start to generate jobs at a rate of at least 300,000 to 350,000 per month, we're going to be disappointed with the pace of activity."

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Video: Economic recovery hits the skids

  1. Closed captioning of: Economic recovery hits the skids

    >>> we spent a lot of time on the broadcast here focusing on the mounting signs that the economy is slowing again. and this morning, we got what could only be described as a very disappointing jobs report. employers added only 54,000 people to their payrolls. as a result, the unemployment rate ticked up to 9.1%.

    >> nobody expected a number for this yeek. for months, we have been averaging a twauquarter of a million jobs per month, but in may, it seems like the economy hit the brakes.

    >> up, $54,000. up $54,000.

    >> the news at 8:30 this morning was a shocker.

    >> no matter how you cut nis data.

    >> , it's lousy.

    >> they added only 54,000 jobs in may, not even a third of what analysts hoped for. in all, 13.9 million americans are now unemployed. just to keep the unemployment rate where it is, the economy needs to create as many as 150,000 jobs each month. three times the number created last month.

    >> to bring down unemployment, we're going to have to create at least 200,000 jobs, probably more than that, each month.

    >> the overall weakness in the jobs market was widespread. retailers cut 8,500. manufacturers cut 5,000, more than half of the auto sector struggling to get parts from japan after the earthquake. meanwhile, state and local governments continue cutting back and laying off. 440,000 jobs lost since september 2008 . 18,000 of them in education. in indianapolis, hundreds stood in line for a job at the indiana state fair . while in los angeles , thousands of homeowners are meeting with refinance specialists this week, desperate to cut their mortgage bills. shawn lost her job as a nurse last year.

    >> i want to save my home.

    >> form er fed chairman said it's time to raise the detaxes.

    >> the fact i'm in favor of the clinton tax structure is an indei indication of how scared i am of how this deblthd has emerged and its magnitude. dm.

    >> the gas prices are coming down, the europeans are dealing with its crisis, and japan is working through its crises. but it's going to take a while before we can work out of this hole.

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