WASHINGTON (AFX) - The drop in the U.S. unemployment rate in May masked underlying weakness in the non-farm payrolls report, said David Orr, chief economist at First Union Corp, who stuck with a forecast that the Federal Reserve will cut interest rates by 25 basis points later this month.
"The drop in the unemployment rate was an aberration," Orr said, explaining that the data underlying the unemployment rate calculation still showed a drop in civilian employment.
"Also, there was no increase in total hours worked," Orr said. Hours worked is an essential indicator, because GDP is composed of hours worked and productivity.
Given that hours worked declined by 0.3 hours in April, Orr said "that is not a good sign" for the second quarter.
Although the drop in unemployment "makes it a tougher call" to forecast the results of the Federal Open Market Committee meeting on June 26/27, Orr said other weak data support projections for a 25 basis point cut in the key federal funds rate.
"The fact that the unemployment rate went down gives more weight to the idea that they might not do anything," he noted, but added that "on balance, given weakness in earnings and durable goods, and a decline in private-sector jobs (in May)," conditions are still weak enough to warrant further monetary easing.
"My guess is it will still be a 25 basis point cut," he concluded.