WASHINGTON — Pressure built Friday on the Federal Reserve to signal whether its ready to begin scaling back its controversial economic stimulus efforts, after a status-quo May jobs report from the government sparked an unusual Wall Street rally.
Non-farm payrolls rose by 175,000 in May, the Labor Department reported, while the unemployment rate up inched up to 7.6 percent because more potential workers returned to the labor force to look for jobs. On the face of it, that was no reason for stocks to soar.
But investors had feared a better report, and they rallied on the status quo.
They worry that the Fed soon will start undoing its controversial purchases of government and mortgage bonds, which have boosted the stock market. The purchases are part of an effort called quantitative easing, now in its third incarnation and dubbed QE3, in which the Fed buys $85 billion a month worth of bonds, driving down their return to investors.
Because these bonds pay so little, investors are forced into riskier bets with high returns. The Feds effort has boosted stocks at the expense of many bond investors or those who keep money in certificates of deposit. Financial markets took Fridays report to mean that the Fed wont start tapering off its support for the economy until late this year.
It doesnt change the outlook for jobs or the Fed taper of QE3, said Scott Anderson, the chief economist for San Francisco-based Bank of the West. You can read into this months payroll report just about anything you like. Bulls and bears will both find something to support their case. The truth is somewhere in between.
The bulls carried Wall Street on Friday. The Dow Jones industrial average shot up more than 150 points within the first hour of trading and finished up 207.50 points at 15,248.12. The S&P 500 closed in the black, rising 20.82 points to 1,643.38. The tech-heavy Nasdaq ended up 45.17 points to 3,469.22.
In coming days, however, therell be great investor attention to hints in the speeches of Fed governors ahead of the June 18-19 meeting of the rate-setting Open Market Committee.
The Fed is unlikely to taper off the pace of bond purchases based on todays number, Nariman Behravesh, the chief economist for forecaster IHS Global Insight, wrote in a note Friday to investors. It would likely take a steady stream of payroll increases of around 175,000 (or more) and declines in the unemployment rate before the Fed can declare victory.
Because of the across-the-board federal spending cuts called the sequester, hiring is likely to remain in the 150,000- to 175,000-a-month range, Behravesh and other economists said, making it likely that the Fed wont change its support for the economy until near the end of the year. The spending reductions, particularly on defense programs, are blamed for sluggish economic growth over the past two quarters and for restraining stronger hiring.
I dont expect job growth to meaningfully pick up until the fiscal head winds stop blowing as hard. And that wont happen until late this year, said Mark Zandi, the chief economist for forecaster Moodys Analytics. But assuming Congress and the administration pass legislation raising the debt limit and funding government next year in a reasonably graceful way, then the job market should swing into higher gear next year.
There are several recent signs that point to a gradually improving economy. Retail data for same-store sales in May was positive, and the Feds survey of economic conditions, called the Beige Book, showed this week a continued modest pace of economic recovery.
First-time claims for unemployment benefits fell again Thursday, and the four-week average is at its lowest point since the 2008 financial crisis started. The employment placement firm Challenger, Gray & Christmas this week reported a third straight month of falling layoffs.
A closer look at Fridays jobs numbers is similarly positive. The Labor Department revised downward the jobs numbers from the previous two months, but by a combined total of just 12,000.
Looking past the slight uptick in the jobless rate, which rose from 7.5 percent in April, Alan Krueger, the head of the White House Council of Economic Advisers, attributed it in a statement to people whod previously given up now beginning to look for work again. He noted that the labor force participation rate also rose (slightly) . . . as 182,000 more unemployed workers re-entered the labor force in May than in April, a sign that more workers felt encouraged to search for a job.
Professional and business services, composed of better-paying white-collar jobs, led all sectors with an increase of 57,000 positions in May. Retailers added almost 28,000 jobs, and the leisure and hospitality sector added 43,000 for the second straight month. Even the hard-hit construction sector added a modest 7,000 jobs last month.
Offsetting the gains, the federal government shed another 14,000 jobs and manufacturers, a leader in the initial stages of recovery, cut another 8,000 jobs in May, the third straight month of decline.
Manufacturers have added just 41,000 workers over the past 12 months, or just 1.9 percent of total non-farm jobs created, signifying that the sectors contributions are well below what we need to see, Chad Moutray, the chief economist for the National Association of Manufacturers, wrote in his blog Shopfloor.org.
There was another troubling detail within the report.
One blemish is that the quality of the jobs has weakened in recent months. Manufacturers are reducing higher-paying jobs, and the big gains in employment have been in lower-paying retail and temp help jobs, said Zandi, of Moodys Analytics.
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