Bleak jobs report dampens hopes of steady growth

Bleak jobs report dampens hopes of steady growth

June 4th, 2011 by Associated Press in Local - Breaking News

By CHRISTOPHER S. RUGABER

AP Economics Writer

WASHINGTON - A bleak jobs report suggests the recovery from the Great Recession will be longer and bumpier than many economists had envisioned.

Most economists say job growth should strengthen later this year as gasoline prices drop further and the economy recovers from the effects of natural disasters in the U.S. and abroad. But the recovery is starting to weaken 17 months before the 2012 election, which could hurt President Barack Obama's re-election prospects.

The unemployment rate in May inched up to 9.1 percent from 9 percent, the Labor Department said Friday; when Obama took office, it was 7.8 percent.

The Conference Board, a business research group, predicts the rate will be 8.5 percent at the end of next year. That would mean Obama would face a higher unemployment rate than any president running for re-election since World War II.

"The recovery has not been derailed, but it's slow," said Michelle Meyer, an economist at Bank of America Merrill Lynch. "We're still in a muddle-through period."

Only 54,000 jobs were created in May, the fewest in eight months. By contrast, an average of 220,000 jobs were created in each of the previous three months. Private companies hired only 83,000 workers in May - the fewest in nearly a year - while state and local governments cut 30,000 jobs.

The Dow Jones industrial average finished down 97 points, its third straight loss. The Dow, Standard & Poor's 500 and Nasdaq composite have all declined in each of the last five weeks, the longest losing streak since mid-2008.

However, the U.S. economy's service sector, which employs 90 percent of the nation's work force, grew in May for an 18th straight month, posting slightly faster growth than in April.

The Institute for Supply Management said Friday that its index tracking the health of service companies increased to 54.6 in May from 52.8 in April.

In February, the index hit a five-year high with a reading of 59.7, but it fell in March and April as the service sector was battered by the sharp jump in energy prices. Any reading over 50 indicates expansion in the sector.

Several chronic problems are weighing on the economy. Home prices are still falling. The average worker's pay isn't keeping up with inflation. Cutbacks in spending by state and local governments are contributing to slower growth, even in the private sector. And members of Congress are preparing to cut spending.

Gas prices climbed to nearly $4 a gallon this spring. They've since declined to about $3.79 and are expected to fall more, possibly freeing consumers to spend more on goods such as cars, appliances and furniture. Consumer spending accounts for about 70 percent of the economy.

But even if gas prices dip, they'll likely remain high and continue to squeeze consumers and the industries that depend on them. For example, companies that rely heavily on motorists - like hotels and restaurants - cut employment in May.

Even economists who think hiring will pick up don't expect it to grow very fast.

Heidi Shierholz, an economist at the liberal Economic Policy Institute, expects employers to add about 150,000 jobs a month for the next few months. Up to 300,000 new jobs a month would be needed to significantly drive down the unemployment rate.

Among the deepest job cuts were those in local governments, which slashed 28,000 last month, the most since November. Nearly 18,000 were in education. Cities and counties have cut jobs for 22 straight months. Since September 2008, 446,000 jobs have vanished.

State and local government job losses are likely to persist. Though state tax revenue is recovering, states face rising costs for Medicaid and other services. And localities rely on property tax revenue, which will likely continue to shrink because home prices in most areas are still sinking.

"What we need is more government spending to create jobs," Shierholz said. The 2009 stimulus package is largely spent, she said.

Republicans in Congress argue that Washington should instead cut spending and taxes to help generate hiring.

There's little appetite on Capitol Hill for more stimulus spending. And by the end of this month, the Federal Reserve will end its most recent drive to pump money into the economy.

Obama said Friday that the economy faces challenges ahead and "bumps on the road to recovery." But at an event to celebrate the resurgence of the auto industry, he made no mention of the dour economic news that threatened to obscure his optimistic message.

White House economist Austan Goolsbee said the burden is now on the private sector.

"You've seen corporate profits high," he said. "It's now time to get that translated ... into the adding of jobs, building of factories and buying of equipment here at home."

Some employers, however, are cutting payrolls. Retailers cut 8,500 jobs in May, after adding 64,000 in April. And leisure and hospitality, which includes restaurants and hotels, cut 6,000. That sector had added an average of 43,000 in the previous three months.

The small overall job growth wasn't enough to prevent the unemployment rate from rising, largely because more people started looking for work in May and people aren't counted as unemployed unless they're looking for a job. So the actual number of unemployed grew to 13.9 million, from 13.7 million.

Meanwhile, the government revised the previous months' totals to show 39,000 fewer jobs were created in March and April than first estimated. In March, the economy created 194,000 jobs; in April 232,000.

Manufacturers cut 5,000 jobs in May, the first loss in that sector in seven months. That included a drop of 3,400 at automakers, which have been reducing production because they're having a hard time buying parts since the March 11 Japan earthquake that disrupted supply chains.

Some bright spots did emerge in the May report. Professional and business services added 44,000 jobs, most in accounting, information technology services and management.

David Kelley, chief market strategist with J.P. Morgan funds, is among the optimists. He notes that large businesses remain flush with cash. Developing economies such as China and Brazil are still growing briskly and buying more U.S. goods.

And he suggested that pent-up demand for cars and other big-ticket items should continue to grow as the economy improves.

"Consumers will be in better shape, and banks are gradually lending a little easier," Kelley said. "There are plenty of reasons to believe that growth will pick up."

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Associated Press Writers Daniel Wagner and Julie Pace in Washington and Tom Krisher in Detroit contributed to this report.