Job growth stumbles, raising pressure on Fed

WASHINGTON (Reuters) - Job growth braked sharply in May and the unemployment rate rose for the first time in 11 months, putting pressure on the Federal Reserve to ease monetary policy further to shore up the sputtering recovery.

Employers added a paltry 69,000 jobs to their payrolls last month, the least since May of last year, the Labor Department said on Friday. In addition, 49,000 fewer jobs were created in the prior two months than had been thought and the jobless rate rose to 8.2 percent from 8.1 percent in April.

The report is troubling news for President Barack Obama, whose prospects of winning re-election in November could hinge largely on the health of the economy.

Republican challenger Mitt Romney wasted no time in jumping on the data to criticize Obama's economic policies.

"Today's weak jobs report is devastating news for American workers and American families," he said in a statement, calling the report "a harsh indictment of the president's handling of the economy."

Stocks, already on the ropes due to a steady diet of troubling news out of Europe, slid sharply at the open with the Standard & Poor's 500 index down 1.6 percent in the first half hour of trade.

Investors rushed into the safety of government bonds pushing the yield on the benchmark 10-year Treasury note to a record low below 1.5 percent. The dollar fell against the euro.

The White House expressed disappointment in the data.

"We'd like to see faster job growth," Alan Krueger, the chairman of Obama's Council of Economic Advisers, told Reuters Insider. "We have a large hole in jobs right now because of job losses than happened during the recession."

There were a couple spots of relative brightness in the report. An influx of workers into the labor market largely explained the rise in the jobless rate, and the department's survey of households - a more volatile measure - showed robust jobs growth.

A separate report on factory activity in May showed some slowing but suggested the economy was not falling off a cliff.

Economists polled by Reuters had expected nonfarm payrolls to increase 150,000 and the jobless rate to hold steady at 8.1 percent.

Unseasonably warm weather had brought forward hiring into the winter months, and was widely blamed for the step back in March and April.

OVERSEAS WOES

However, the report hinted at fundamental weakness.

"Some had believed that we had decoupled from China slowing and all the problems in Europe, but that seems to be short-sighted," said Malcolm Polley, president and chief investment officer of Stewart Capital Advisors in Indiana, Pennsylvania. "We're slowing alongside the rest of the world."

Data from overseas on Friday was similarly troubling. Chinese factory output barely rose in May and manufacturing activity in Britain shrank at its fastest pace in three years. Earlier data had shown manufacturing activity also declined in Germany and France.

Unlike Europe, where many economies are falling into recession, manufacturing activity is still growing.

The Institute for Supply Management said its factory gauge slipped to 53.5 last month from 54.9 in April, staying comfortably above the 50 line that separates expansion from contraction. New orders hit their highest point in more than a year.

EYES ON THE FED

The weak payrolls report could cause the Fed to move closer to launching a third round of bond purchases. The central bank, which holds a policy meeting on June 19-20, already was nervous over the course of the euro zone debt crisis.

"This puts the Fed firmly in play and they will likely feel compelled to respond. The missing ingredient preventing the Fed from action had been the equity market, but now we are seeing it softening," said Tom Porcelli, chief economist at RBC Capital Markets in New York.

The Fed cut overnight interest rates to near zero in late 2008 and bought $2.3 trillion in bonds to try to spur a stronger recovery. It also has said it expect to keep rates "exceptionally low" through at least late 2014.

Until recently, financial markets had thought officials would likely push up borrowing costs sooner. However, interest rate futures on Friday showed traders now see no chance that rates will rise before the second quarter of 2015.

The level of employment is about 5 million jobs below where it was in December 2007, when the economy fell into recession.

Analysts say the economy needs to create roughly 125,000 jobs a month just to keep the unemployment rate steady.

The labor force participation rate - the share of working-age Americans who either have a job or are looking for one - rose to 63.8 percent after dropping to a 30-year low in April.

Job gains were weak across the board last month, with the private sector adding only 82,000 positions. Government payrolls dropped by 13,000, dragged down by ongoing belt-tightening by local governments.

Construction employment fell 28,000 in May, the fourth straight decline. Manufacturing, the recovery's star performer, added 12,000 jobs.

Given the high unemployment rate, average hourly earnings rose only two cents and the average workweek fell to 34.4 hours.

Slower income growth is holding back consumer spending. A report from the Commerce Department showed consumer spending rose 0.3 percent in April after gaining 0.2 percent in March.

(Additional reporting by Jason Lange and Steve Holland in Washington, and Leah Schnurr and Richard Leong in New York; writing by Lucia Mutikani and Tim Ahmann; editing by Neil Stempleman)

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