Saturday, August 04, 2007

Signs of cooling in US labour market

Signs of cooling in US labour market
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: August 3 2007 14:47 | Last updated: August 3 2007 22:44

The US unemployment rate rose unexpectedly last month to 4.6 per cent, in a sign the labour market is cooling.

Employers added fewer staff to their payrolls than Wall Street economists were expecting, as hiring increased by 92,000 after a gain of 126,000 in June, according to the Department of Labor. The government also lowered its estimate of job creation in the previous two months by 8,000, bringing the annual growth in payrolls below 1.4 per cent for the first time since 2004.

The slowdown in hiring underlined investor fears that economic growth is vulnerable to a downturn in job creation, viewed as one of the main supports for consumer spending amid the worst housing downturn in 16 years.

The dollar’s value dropped against other leading currencies while stocks fell. US treasury bond prices rose as investors priced in a lower likelihood of an interest rate rise by the Federal Reserve in the coming months. Interest rate futures pointed to a 68 per cent chance the Fed would cut rates by the fall.

Peter Kretzmer, an economist at Bank of America, said Fed policymakers would welcome a slight increase in the unemployment rate from 4.5 to 4.6 per cent because it reduced inflation pressures.

The central bank is expected to keep interest rates on hold when it meets next week and again underline its concern that unwelcome price increases will return.

Workers’ average hourly earnings rose 6 cents, or 0.3 per cent, in line with forecasts, after a 0.4 per cent increase in each of the previous two months.

Mr Kretzmer said the easing in the labour market was gradual and would not alter the Fed’s forecast for “moderate” growth this year.

Economists pointed out that much of last month’s slowdown in job creation was due to a cutback in government hiring and added that private sector employment appeared resilient.

Bruce Kasman, chief economist at JPMorgan, said the risks to growth had risen in recent weeks after a sharp fall in equities, renewed housing market weakness and softer consumer spending.

He said the biggest risk - albeit an unlikely one - was that consumers would have difficulty sustaining spending habits if credit markets tightened, making affordable loans harder to find, and the job market worsened.

Administration officials said the economy would weather the housing slump and market turbulence.

Carlos Gutierrez, commerce secretary, said: “Other sectors can pick up the slack. We have managed through hurricanes, 9/11 and stock market downturns, so we’ll manage through this.”

But Charles Schumer, a Democratic senator, said: “The uptick in the unemployment rate, downward revisions to jobs created in May and June, combined with the ongoing subprime lending crisis, should spur the administration into more action and less cheerleading.”


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