Job Growth Regains Steam, Keeping Fed Rate Hike on Track

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Economy Jobs
M. Spencer Green/AP
By Lucia Mutikani

WASHINGTON -- U.S. job growth rebounded last month and the unemployment rate dropped to a near seven-year low of 5.4 percent, signs of a pick-up in economic momentum that could keep the Federal Reserve on track to hike interest rates this year.

Nonfarm payrolls increased 223,000 as gains in services sector and construction jobs offset weakness in mining, the Labor Department said Friday. The 0.1 percentage point decline in the unemployment rate to its lowest level since May 2008 came even as more people piled into the labor market.

%VIRTUAL-pullquote-We see this report as reducing concerns that weak first-quarter growth represents a loss of economic momentum.%While the report suggested underlying strength in the economy at the start of the second quarter after a bad stumble, wage growth was tepid and March payrolls were revised downward, leading financial markets to push back rate hike bets.

"We see this report as reducing concerns that weak first-quarter growth represents a loss of economic momentum," said Michael Gapen, chief U.S. economist at Barclays in New York.

Nevertheless, he said the bounce back wasn't strong enough to think the Fed could bump rates higher before September.

March payrolls were revised to show only 85,000 jobs created, the fewest since June 2012. That resulted in 39,000 fewer jobs added in February and March than previously reported, underscoring the weakness in activity at the start of the year.

Investors on Wall Street cheered the report, with major stock indexes rising more than 1 percent.

Yields on U.S. Treasury debt slipped and futures contracts showed traders clinging to bets the U.S. central bank would raise rates from near zero this year. The dollar was little changed against a basket of currencies.

Labor Market Tightening

The drop in the unemployment rate pushed it within a whisker or two of the 5 percent to 5.2 percent range that most Fed officials consider consistent with full employment.

Some economists said the tightening labor market could push Fed officials to tighten monetary policy despite anemic wage growth.

"Even without wages or inflation picking up, we do not think the Fed will feel comfortable sitting at zero as the unemployment rate closes in on 5 percent," said Michelle Girard, chief economist at RBS in Stamford, Connecticut.

Also encouraging, the labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, rose 0.1 percentage point to 62.8 percent, although that was just up from a 36-year low.

Other measures on the Fed's so-called dashboard also improved further.

A broad measure of joblessness that includes people who want to work but have given up searching and those working part-time because they can't find full-time employment fell to 10.8 percent - the lowest level since August 2008.

In addition, the number of long-term unemployed continued to fall.

Tepid Wage Growth

Wages, however, were a weak spot. Average hourly earnings rose just 3 cents in April. While that took the year-on-year gain to 2.2 percent, it remained stuck in the range it has been in for the past few years.

The weakness in average hourly earnings is in stark contrast with other compensation measures that have suggested solid wage growth in recent months.

"With the unemployment rate approaching full-employment levels it will only be a matter of time before wages start to rise at a somewhat swifter pace," said Scott Anderson, chief economist at Bank of the West in San Francisco.

Last month, the government reported that the economy expanded at only a 0.2 percent annual rate in the first quarter, but data earlier this week showing a wider-than-forecast trade deficit suggests GDP actually shrank.

There was a broad-based acceleration in job growth in April, with the exception of the mining sector, where a plunge in crude oil prices has undercut energy production.

Schlumberger (SLM), the world's No.1 oil-field services provider, said last month it would cut a further 11,000 jobs, bringing total layoffs this year to 20,000. Baker Hughes (BHI) and Halliburton (HAL) have also announced thousands of redundancies.

Mining payrolls fell 15,000, logging the fourth straight month of declines. Manufacturing employment increased 1,000 after being flat in March as factories struggle with a strong dollar. Construction payrolls jumped 45,000 after falling 9,000 in March.

Private services employment rose 182,000 and government payrolls increased 10,000.

10 PHOTOS
9 Numbers That'll Tell You How the Economy's Really Doing
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Job Growth Regains Steam, Keeping Fed Rate Hike on Track
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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