A key labor market report released Friday morning confirms that the pace of job growth is losing momentum.
The Labor Department said the U.S. economy added just 54,000 jobs in May, the fewest in eight months and far fewer than the 150,000 forecast for the month. Earlier this week, some economists downgraded their May job growth expectations after a report showed a sharp slowdown in private-sector job creation last month.
The pace of hiring slowed sharply in May from the previous three months, when the economy added an average of 220,000 new jobs. Private companies hired only 83,000 new workers — the fewest in nearly a year, and local governments cut 28,000 jobs, the most since November.
“Let’s face it — no matter how you cut this data, it’s lousy,” Mesirow Financial Economist Diane Swonk told CNBC Friday.
More people entered the work force in May, but most of them couldn’t find work, pushing the jobless rate up to 9.1 percent from 9 percent in April. And the government revised the previous months’ job totals to show 39,000 fewer jobs were created in March and April than first thought.
The May jobs report offers startling evidence that the U.S. economy is slowing, hampered by high gas prices and natural disasters in Japan that have hurt U.S. manufacturers. Stagnant wages and a depressed housing market are also holding back the economy. The biggest question raised by the sluggish report: Is it temporary, or the beginning of a weaker trend?
Speaking at the conclusion of a visit to a Chrysler plant in Ohio, President Barack Obama said Friday that the economy faces challenges ahead and “bumps on the road to recovery,” although he did not specifically mention Friday’s dismal May jobs report.
Many factors holding back the economy, such as the disruptions to manufacturing output stemming from Japan's March 11 earthquake, are temporary.
If those factors lead to a sustained downturn in job creation, that could cut consumer spending, threatening overall growth for the rest of this year, Goldman Sachs economist Jan Hatzius wrote in a note to clients Wednesday.
Despite the worries about slowing growth, the government has shifted away from economic stimulus and is focused on debt reduction. The Federal Reserve isn't expected to take any further steps to spur growth. Persistent economic weakness could imperil President Barack Obama's prospects in the 2012 election.
"There are reasons to be worried," said Michelle Meyer, an economist at Bank of America Merrill Lynch. "It appears there's not much desire to do more in Washington even as the economy weakens."
Pressure to focus on debt reduction was heightened Thursday by a warning from Moody's Investors Service. The credit rating agency said it might downgrade the nation's credit rating if the government failed to make progress in raising the debt limit in coming weeks. Republicans say they will agree to raise the limit only if Democrats back deep spending cuts.
Higher gas prices have left less money for consumers to spend on other purchases, like furniture, appliances and vacations. And average wages aren't even keeping up with inflation. As a result, consumer spending, which fuels about 70 percent of the economy, is growing sluggishly.
Oil prices soared from about $70 a barrel last summer to as high as $115 this spring. They were driven up by turmoil in the Middle East and rising demand in developing countries. More expensive oil sent gas up to nearly $4 a gallon nationwide, though both oil and gas prices have ticked down in the past few weeks. Gas averaged $3.78 a gallon Thursday, according to AAA.
Higher prices for energy and raw materials have also left businesses increasingly cautious about hiring and expanding. And growth in manufacturing output weakened last month, in part because the March earthquake in Japan disrupted supplies of electronic components and other parts. Those disruptions have also reduced auto production and sales.
Nariman Behravesh, chief economist for IHS, thinks the economy will pick up once gas prices decline further and Congress and the White House resolve their conflict over the debt ceiling.
More evidence of the economy's weakness surfaced Thursday:
- The number of people applying for unemployment benefits remains stuck at a level that signals weak job growth.
- Factories received fewer orders for computers, autos, industrial machinery and other goods in April.
- Small businesses are hiring less. May marked a second month of weakness after solid gains in February and March.
So what happens now? In the short run at least, not very much.
Many economists think the nation would have to start losing jobs again before the Federal Reserve would be willing to pump more money into the economy.
Until the acrimonious debate about whether to raise the debt limit and slash spending is resolved, many companies will be wary about spending more of their cash hoard, Behravesh said.
When the debt-ceiling issue is resolved, he said, "businesses might feel less uncertainty about the outlook, and be more willing to get out there and invest and hire."