--US jobs seen still on declining trend despite some May improvement

By Mariko de Couto and Regina Schleiger
New York, June 1 (BridgeNews) - The U.S. employment situation in May appeared to have improved slightly but the details of the report indicate that the overall trend remains sluggish and will likely head toward further deterioration the next few months, economists said. The Federal Reserve, therefore, will have to stick to its easing stance for now and could very well ease again by 25 basis points at the policy meeting the end of the month.
* * * At first glance, some of the major aspects of the May report appeared to have improved, but the data did not really give a significantly altered version of job conditions from April when the labor market appeared to have weakened dramatically, economists said.
The non-farm payroll number was not as weak as the forecast of a 50,000 decline, but still in the negative. Non-farm payrolls fell 19,000 in May, with the jobless rate at a lower-than-expected 4.4% compared with the consensus forecast of 4.6%.
While the drop in the unemployment rate could be seen as a good piece of news, economists generally said that the decline does not necessarily bode well because overall employment is still on a falling trend. The March and April payroll numbers were both revised upward but economists had already expected these revisions because of technical adjustments. March payrolls were revised up to a gain of 59,000, while the decline in April jobs was revised upward to down 182,000 from the originally reported 223,000 drop.
Economists said these revisions were not as surprising as they seem. The annual re-benchmarking of the data incorporated in the May report had already prompted economists to believe that as much as half of the declines in March and April payrolls would be shaved off. The May report incorporated changes which the Bureau of Labor Statistics makes every year to adjust for complete unemployment insurance tax records.
Another piece of disappointing news came in the closely-watched help-supply component, which rose a paltry 1,000 jobs. The gain is an improvement but is not significant enough to offset the softening trend in recent months. In April, the help-supply component in the narrowly-defined services sector plunged 108,000.
This component shows the hiring and laying off of temporary workers which helps gauge the trend in temporary workers. Trends in temporary staff employment is key because they tend to serve as a leading indicator for general employment conditions.
Moreover, persistent weakness was again seen in the manufacturing sector, which lost 124,000 jobs.
Meanwhile, some positive aspects of the report were the gains in both construction and service-producing jobs which added 31,000 and 70,000 jobs, respectively.
Christopher Low, chief economist at First Tennessee Capital Markets, said that the bottom line of the May report is that the employment situation in the U.S. will soften further and has yet to stabilize. "We're just seeing some recovery in the hardest hit areas but nothing that promises future growth," he said.
The rise in the help-supply component was not overly encouraging because of its small size, he said. Moreover, the gain of 31,000 jobs in the construction arena was not that cheering either given the overall weakening trend, he said.
Still, the softness in the May employment report were not as severe as feared, so the Fed might opt for a 25-basis-point cut instead of a larger 50-basis-point easing at the June 26-27 Federal Open Market Committee meeting, he said.
David Resler, chief economist at Nomura Securities International, said the economy is sliding and these data give no cause to think otherwise. "I don't see anything to be upbeat about," Resler said, adding that the Fed's debate of the size of another possible rate cut would continue regardless of the outcome of the May labor numbers. "The manufacturing sector is just pathetic and these numbers were roughly consistent with what was expected," Resler said.
"Anybody who says that (the report) has implications for Fed policy obviously hasn't read the minutes of the last meeting."
Resler still expects the U.S. economy will "get a good bounce probably late into the third quarter or fourth quarter" this year but the latest jobs report does not add any positive definition to a recovering scenario. "My feeling is that there's not enough here to say that they're out of the woods yet," Resler said.
"There's a debate about the size of the easing that is independent of this number and focused on about how much additional stimulus will the economy need with Congress" scheduled to provide tax relief to taxpayers over the next several months.
Resler recited recent comments by Fed Chairman Greenspan and Governor Lawrence Meyer who have noted "there is a lot of front-loaded stimulus out there."
Mark Vitner, an economist at First Union, said that the May employment report does not add too much to the overall employment picture but just confirms that the job situation remains a concern in the U.S. "I still think that at the end of the day, it's more bad news for the labor market," he said.
For one, the drop in the jobless rate to 4.4% is not that heartening because the labor force is generally declining. "This is not a sign of strength," he said.
"I think that this keeps the Fed in the easing camp," Vitner said. The Fed could very well ease by another 50 basis points at the policy meeting this month.
He pointed out that the factory sector continues to be weak, while he said the 5,000 decline in retail jobs is indicative of the weakness in this industry.
Retailers are probably cautious about hiring, he noted, adding that the three major areas in the U.S. economy struggling at the moment are retail, high-tech and manufacturing.
"And nothing in this report suggests that they're seeing improvement," he said.
But outside of these three sectors, he is seeing "pockets of resistance" to the overall slowdown. He cited the construction industry as one area that did fairly well in May.
Construction jobs usually pick up in May because of improved weather but the 31,000 increase in May was much higher than usual, he noted. Some economists, however, were a little more optimistic about the May jobs data.
FleetBoston Financial Group chief economist Wayne Ayers described the report as "good news, particularly with the revision last month." This suggests that maybe the worst is behind us," Ayers said. "It confirms the equity and bond markets' expectation that the economy will improve in the second half of the year," said Ayers who had forecast non-farm payrolls to be down 70,000.
He said the Fed will "take the numbers apart very quickly" and given another interest rate easing in June was already likely prior to these data, the strength of the report may help raise the possibility of a 25-baisis-point cut in the federal funds rather than 50 basis points, as had been expected by financial markets.
"(Fed Chairman Alan) Greenspan all but made it official they will move in June but the debate will be over whether they go 25 points or 50 over the next few weeks," he said.
Rory Robertson, an economist with Macquarie Equities, agreed the data were stronger-than-expected, adding that it offsets some of the drastic weakness that appeared to be emerging in the labor market. "I guess it makes (the Fed) a lot less concerned" that the economy could slip backwards.
The May report had already been expected to be a little more complicated than usual due to a number of technical adjustments, including the new and updated seasonal adjustment factors.
On top of the annual re-benchmarking, the May employment data also incorporated changes to the so-called "bias adjustment factor" that is used to adjust for creation of net new businesses in a jobs report.