The U.S. created just 38,000 new jobs in May and nearly half a million people dropped out of the labor force, raising doubts about the strength of the economy and possibly forcing the Federal Reserve to scuttle plans to raise interest rates this summer.
The increase in hiring was the smallest since the fall of 2010. Economists polled by MarketWatch had predicted a gain of 155,000 nonfarm jobs.
More than half of the nation’s major industries eliminated jobs last month, the first time that’s happened in several years. In another bad sign, temp employment fell by 21,000 and it’s down 64,000 so far this year, the Labor Department said Friday.
The dropoff in temporary work in 2016 is the sharpest of the seven-year-old recovery and might be a sign that hiring is likely to remain soft. Temp hiring usually increases when the economy is strong, with many of those workers eventually getting hired full time.
The number of new jobs created would have been twice as large in May if not for a major Verizon strike that kept 35,000 employees out of work. But the jobs report was still the weakest in at least two-and-a-half years even if there were no ill effects from the strike.
“Very disappointing,” said JJ Kinahan, chief strategist at TD Ameritrade. “That’s two months in a row of disappointing job reports. We are heading in the wrong direction.
In late Friday trades, U.S. stock were modestly lower and Treasury yields fell to a two-month low.
Yet Kinahan and other economists cautioned against it will take more time to gauge just how much the labor market has softened. Other indicators such as low jobless claims, record job openings and rising employment in the huge U.S. service sector imply that hiring is still fairly healthy.
“This report is so much weaker than other labor market data that does not meet the sniff test,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.
He points to the decline in construction jobs in May and April at a time when sales and construction are rising and builders complain they can’t find enough skilled workers.
In a surprising twist, the unemployment rate fell to 4.7% from 5% to mark the lowest level since the month before the Great Recession began in December 2007.
The decline owed almost entirely to 458,000 people leaving the labor force, typically a sign jobs are harder to find. As a result, the labor-force participation rate fell for the second month in a row to 62.6%.
A broader measure of unemployment that includes discouraged jobseekers and people forced to work part-time was unchanged at 9.7%. That’s still unusually high so late into a recovery.
The poor May jobs report and clear slowdown in hiring could force the Fed to delay plans to raise interest rates in either June or July. The central bank had been poised to raise rates soon amid a raft of other evidence suggesting the economy continues to grow at a modest pace.
Federal Reserve Gov. Lael Brainard on Friday called for the central bank to wait for more data before lifting interest rates. She said the jobs report shows the labor market has slowed.
What might still keep the Fed on track to raise rates later this year is upward pressure on wages. Even though hiring has tapered off, the unemployment rate is low and many companies face pressure to raise pay.
Striking Verizon employees, for instance, won a 11% increase in wages over the next four years instead of the 6% raise the company was offering. A survey by a trade group representing small businesses also said this week that firms are offering higher pay to entice workers.
Average hourly wages climbed 0.2% last month to $25.59. Hourly pay rose 2.5% from May 2015 to May 2016, just a hair below the post-recession high.
What’s more, the economy appears to have picked up speed after a slow start to the year. Economists predict the U.S. economy will expand at a 2.5% annual clip in the second quarter, up from a dismal 0.8% reading in the first three months of the year.
Still, the slowdown in hiring is sure to raise alarms at a Fed that’s already divided about its next move. Over the last three months, the pace of hiring has dropped to the slowest in four years.
The government marked down the number of new jobs created in April to 123,000 from 160,000. March’s gain was lowered to 186,000 from 208,000.