WASHINGTON (Reuters) - The U.S. economy created the fewest number of jobs in more than five-and-a-half years in May as manufacturing and construction employment fell sharply, suggesting slippage in the labor market that could make it harder for the Federal Reserve to raise interest rates.
Nonfarm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010, the Labor Department said on Friday.
Employment gains were also restrained by a month-long strike by Verizon workers, which depressed information sector payrolls by 34,000 jobs. But even without the Verizon strike, payrolls would have increased by a mere 72,000. The Verizon workers, who were considered unemployed because they did not receive a salary during the payrolls survey week, returned to their jobs on Wednesday. They are expected to boost June employment.
Underscoring the May jobs report's weakness, U.S. employers hired 59,000 fewer workers in March and April than previously reported.
While the unemployment rate fell three-tenths of a percentage point to 4.7 percent in May, the lowest level since November 2007, that was in part due to people dropping out of the labor force.
"This is not a good report, and it may well give Fed officials second thoughts about increasing interest rates again this month or next, as some have suggested lately," said Peter Ireland, an economics professor at Boston College.
The Fed has signaled its intention to raise rates soon if job gains continued and economic data remained consistent with a pickup in growth in the second quarter.
Fed Chair Yellen said last week that a rate increase would probably be appropriate in the "coming months," if those conditions were met. The U.S. central bank hiked its benchmark overnight interest rate in December for the first time in nearly a decade.
Economists polled by Reuters had forecast payrolls rising by 164,000 in May and the unemployment rate falling to 4.9 percent
The weak employment report bucks data on consumer spending, industrial production and housing that have suggested the economy is gathering speed after growth slowed to a 0.8 percent annualized rate in the first quarter.
In separate reports on Friday, the Commerce Department said goods exports rebounded strongly in April and orders for manufactured goods recorded their biggest gain in six months.
Some economists say the sharp slowdown in employment last month was payback after unseasonably warm weather boosted hiring in February and March. They also viewed the weak payroll growth as a delayed response to tepid first-quarter economic growth.
"Employment sometimes lags economic activity, which means the weakening trend in the first five months of this year may simply reflect the sharp slowdown in the economy in the first quarter, exacerbated in April and May by a shift of some seasonal hiring," said Chris Low, chief economist at FTN Financial in New York.
The goods producing sector, which includes mining, manufacturing and construction, shed 36,000 jobs, the most since February 2010.
Other details of the employment report also were not encouraging. Average hourly earnings rose five cents, or 0.2 percent. That kept the year-on-year rise at 2.5 percent.
Economists say wage growth of between 3.0 percent and 3.5 percent is needed to lift inflation to the Fed's 2 percent target. There are, however, signs that inflation is creeping higher as the dampening effects of the dollar's past rally and the oil price plunge dissipate.
A broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment held steady at 9.7 percent in May.
The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell 0.2 percentage point to 62.6 percent.
The job gains in May were broadly weak, with the private sector adding only 25,000 jobs, the smallest number since February 2010. Manufacturing employment fell by 10,000 jobs and construction payrolls dropped 15,000.
Mining employment maintained its downward trend, shedding 10,000 positions. Mining payrolls have dropped by 207,000 since peaking in September 2014, with three-quarters of the losses in support activities.
Retail payrolls rose 11,400 after shedding jobs in April for the first time since December 2014. Wholesale trade employment fell by 10,300 jobs. Temporary help jobs dropped 21,000, a potential sign of weak employment gains in the months ahead.
There were declines in utilities and transportation and warehousing employment. Government payrolls increased 13,000.
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