South-Western College Publishing - Economics  
Job Numbers Down in May
Subject Job Growth
Topic Employment, Unemployment, and Inflation
Key Words

Job Growth, Economic Growth, Labor Force

News Story

The U.S. labor market expanded at a slower than expected pace for May 2005. The nation added 78,000 jobs in May, about half the number in the previous three months, and the smallest increase in the last two years. Following a year of robust economic growth, more was expected of the labor market. Economists point to the new numbers as evidence that American employers continue to doubt the strength of the present economic recovery.

In fact, the latest report from the Labor Department caused some analysts to rekindle talk of an economic slowdown, as well as speculation that the Federal Reserve may stop raising interest rates sooner than expected. However, analysts cautioned that the month-to-month numbers often bounce wildly and a better measure is to check the average pace over six months or a year.

"The economy has slowed form its strong pace, but the data have been so strange and volatile that it is unclear what its true condition is," said Joel Naroff, president of Naroff Economic Advisers in Holland, PA.

The nation has added an average of 180,000 jobs per month over the last year, but only about 158,000 per month since February. This trend in job growth is in line with economists who predict slower but continued economic growth, a situation not likely to alter the Fed's stance on interest rates.

The Federal Reserve has raised the federal funds rate on overnight loans between banks to 3 percent from 1 percent since June 2004. Given current economic conditions, it is likely to increase the rate by another quarter point at the next meeting. Most Fed officials continue to signal that interest rates are still below the "neutral" level that would prevent a revival of inflation.

Labor costs are an important indicator of future inflation, and Fed officials have made it clear that they are more worried about inflation than about slower economic growth.

"We do not expect Fed officials to alter their broadly upbeat view of the labor market on the basis of this report," wrote economists at Goldman Sachs in a note to clients on Friday.


Use a production possibilities curve to explain economic growth.

2. Discuss the "neutral" level of interest rates.
3. Explain why the Fed considers labor costs as an indicator of future inflation.
Source Edmund Andrews, "Hiring Brakes Sharply After Big April Gains," The New York Times Online, June 4, 2005.

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