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updated: 6/7/2013 12:08 PM

U.S. employers add 175K jobs, rate up to 7.6 percent

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  • Jobseeker Anu Vatal of Chicago speaks with Patrice Tosi of BluePay, seated, during a career fair in Rolling Meadow. The government The Labor Department said Friday that the unemployment rate rose to 7.6 percent from 7.5 percent in April.

      Jobseeker Anu Vatal of Chicago speaks with Patrice Tosi of BluePay, seated, during a career fair in Rolling Meadow. The government The Labor Department said Friday that the unemployment rate rose to 7.6 percent from 7.5 percent in April.
    Associated Press/May 2013

 
Associated Press

WASHINGTON -- The U.S. economy is adding jobs at a steady pace -- enough to show strength in the face of tax increases and government spending cuts if not enough to reduce still-high unemployment.

Employers added 175,000 jobs in May, and the unemployment rate rose to 7.6 percent from 7.5 percent in April, the Labor Department said Friday. The rate rose because more people began looking for work, a healthy sign. About three-quarters found jobs.

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The government revised the job figures for the previous two months. April's gain was lowered to 149,000 from 165,000. March's was increased slightly to 142,000 from 138,000. The net loss was 12,000 jobs.

Investors appeared pleased by the evidence that job growth remains steady. The Dow Jones industrial average was up nearly 200 points in late-morning trading.

Friday's job figures provided further evidence of the U.S. economy's resilience. The housing market is strengthening, auto sales are up and consumer confidence has reached a five-year peak. Stock prices are near record highs, and the budget deficit has shrunk.

The U.S. economy's relative strength contrasts with Europe, which is gripped by recession, and Asia, where once-explosive economies are now struggling.

Many analysts expect the U.S. economy to strengthen later this year.

"Today's report has to be encouraging for growth in the second half of the year," said Dan Greenhaus, an analyst at BTIG LLC.

It also eased worries that had arisen after economic reports earlier this week had suggested that the economy might be weakening.

Employers have added an average of 155,000 jobs the past three months. But the May gain almost exactly matched the average increase of the previous 12 months: 172,000.

Analysts said the less-than-robust job growth would likely lead the Federal Reserve to maintain the pace of its monthly bond purchases for at least a few more months. The Fed has said it will keep buying bonds at the same rate until the job market improves substantially. The bond purchases have helped drive down interest rates and boost stock prices.

Stock markets have gyrated in the past two weeks on speculation that the Fed would soon start to taper its $85 billion-a-month in bond buying -- a step that could raise rates and cause stock prices to fall.

"I think the Fed will stay on hold," said Nariman Behravesh, chief economist at IHS Global Insight. "They want to see numbers above 200,000 on payroll jobs on a consistent basis before they start to taper off."

Behravesh said he thinks the Fed will maintain its pace of bond buying through this year before scaling it back in 2014.

"Today's report is perhaps the perfect number for nervous investors," said James Marple, Senior Economist at TD Economics. "It is strong enough to point to continued economic recovery but not so strong as to bring forward expectations of Fed tapering."

Other analysts who have predicted that the Fed would start trimming its bond purchases later this year said they didn't think Friday's jobs report would change that timetable.

John Canally, an economist at LPL Financial, blames the Federal Reserve for not specifying how much monthly job growth it wants to see before it scales back its bond buying.

"They have not been transparent enough," Canally said. "That is what has unhinged markets."

Americans appear more optimistic: 420,000 people started looking for work in May. As a result, the percentage of Americans 16 and older either working or looking for work rose to 63.4 percent from a 34-year low 63.3 percent in April.

This is called the labor force participation rate. Higher participation can boost the unemployment rate. That's because once people without a job start looking for one, they're counted as unemployed.

Many people who entered the work force last month didn't find jobs right away. As a result, the number of unemployed rose 101,000, and the unemployment rate rose.

Labor force participation has been falling since peaking at 67.3 percent in 2000. That's partly the result of baby boomers retiring and dropping out of the work force.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, thinks an improving job market will encourage more Americans to look for jobs. He predicts that the participation rate will level off at around 63.5 percent.

Some signs in the report suggested that the spending cuts and weaker global growth are weighing on the job market. Manufacturers cut 8,000 jobs, and the federal government shed 14,000. Both were the third straight month of cuts for those industries.

The number of temporary jobs rose about 26,000, the second straight month of strong gains. That suggests that employers are responding to more demand but aren't confident enough to hire permanent workers. Many temporary employees work in manufacturing, which cut permanent jobs.

But industries that rely directly on consumer spending hired at a healthy pace -- a sign of confidence that consumers will keep spending. Retailers added 28,000 jobs. Restaurants and hotels added 33,000.

Average hourly wages ticked up just a penny in May, to $23.89. That was because much of the job growth was in lower-paying industries.

But mild inflation is boosting American's purchasing power. Over the past 12 months, hourly wages have risen 2 percent. Inflation has increased just 1.1 percent in that time.

The economy grew at a solid annual rate of 2.4 percent in the first three months of the year. Consumer spending rose at the fastest pace in more than two years. But economists worry that the steep government spending cuts and higher Social Security taxes might be slowing growth in the April-June quarter to an annual rate of 2 percent or less.

Consumers appeared earlier this year to shrug off the tax increase. But in April, their income failed to grow, and they cut back on spending for the first time in nearly a year. A Social Security tax increase is costing a typical household that earns $50,000 about $1,000 this year. For a household with two high-earners, it's costing up to $4,500.

Cuts in defense spending have slowed factory output in some areas, according to a Fed report released this week. Factory activity shrank in May for the first time since November, and manufacturers barely added jobs, according to a survey by the Institute for Supply Management.

A separate ISM survey found that service companies grew at a faster pace last month but added few jobs. Service firms have been the main source of job growth in recent months.

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