US unemployment fuelling recovery

A Reuters report from Washington today suggested that the strongest sign as appeared to show that the recession in the United States is diminishing. According to the report, even as the unemployment rate there had hit its highest level in nearly 26 years, the pace of job losses slowed sharply in May.

The US Labor Department said that US employers cut 345,000 jobs in May, the fewest since September and far less than economists had forecast. They cut 504,000 jobs in April. However, the unemployment rate raced to 9.4 per cent (highest since July 1983) from 8.9 per cent in April, partly because people who had given up looking for work re-entered the labour market, a sign of returning economic confidence.

“It keeps hopes alive for a full recovery in the US economy by the second half. It’s a step in the right direction,” said John Canally, investment strategist and economist for LPL Financial in Boston.

The relatively small decline in payrolls fell far shy of the 520,000 drop expected by financial markets, sparking market rumours that the government had published incorrect figures, speculation dismissed by Labor Department officials.Some market participants said the department’s adjustments to a model estimating the creation of new ventures and the destruction of old ones had led to an overstatement in employment. But economists said this argument was flawed.

The US recession, now in its 18th month, is the longest since the Great Depression and has wiped out six million jobs, although March and April’s data were revised to show 82,000 fewer jobs were lost in those months than previously reported. Job losses had previously averaged 643,000 a month.

“The light at the end of the tunnel just got a lot brighter. May’s … report brings clear evidence the labour market is beginning to stabilise,” said Nigel Gault, chief US economist at IHS Global Insight in Lexington, Massachusetts.

A raft of recent data — from gains in home sales to rising consumer confidence — had already fuelled optimism that economic growth would resume in the second half of the year.

High unemployment, coupled with falling home values, is forcing Americans to change their spending habits. Fed data on Friday showed consumer borrowing dived US$15.68 billion (RM54.88 billion) in April after plunging a record US$16.57 billion in March.

While the job losses in May were spread across almost all sectors, the pace of layoffs was slower than in prior months.

Construction jobs fell 59,000 after dropping 108,000 in April, likely as a result of the government’s US$787 billion stimulus package.

The service-providing side of the economy shed 120,000 positions after eliminating 230,000 in April. Manufacturing purged 156,000 jobs in May, possibly reflecting auto plant shutdowns in the wake of Chrysler’s bankruptcy filing. The sector had shed 154,000 positions in April.

Analysts said firms had aggressively cut jobs in response to sagging demand and were now finding less fat to trim.

Education and health services payrolls rose by 44,000 after increasing 13,000 the prior month. The leisure and hospitality industry, which had been shrinking consistently, added 3,000 jobs.

Government, which in April added 92,000 jobs mostly related to preparations for the 2010 census, cut 7,000 in May.

Analysts said they expect the payrolls contraction to keep easing in the months ahead. The jobless rate, however, is not expected to peak until it hits about 10 per cent next year.

Also in May, a surge in new labour force entrants combined with a drop in employment to push the jobless rate up a sharper-than-expected half-percentage point.

“This is a reminder that getting the unemployment rate down will be a long, drawn-out task, as workers who had previously given up their job search return to the labour force,” said Gault. “But the worst news is behind us, and job declines should progressively soften as the year proceeds.”

In a reminder of the labour market’s weakness, the length of the average work week eased to 33.1 hours from 33.2 in April.

Average hourly earnings climbed to US$18.54 from US$18.52, putting earnings 3.1 per cent above their year-ago level, but still the smallest 12-month gain since the period ended November 2005.

A gauge of labour market slack that measures both the unemployed, people working part-time for economic reasons and those only marginally attached to the labour force hit a record high of 16.4 per cent in May from 15.8 per cent in April. — Reuters

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