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July 8, 2006
WASHINGTON - U.S. employers added a fewer-than-expected 121,000 workers to their payrolls last month, but the jobless rate stayed at a five-year low and hourly earnings rose, a government report showed on Friday.
The Labor Department's employment report was a modest improvement over May's revised gain of 92,000 jobs and pointed to a cooling of U.S. economic growth.
However, the 3.9 percent year-over-year gain in average hourly earnings -- the largest in five years -- and the 4.6 percent unemployment rate heightened expectations that rising wages may weigh on the inflation-wary Federal Reserve.
"It suggests we might have slowing growth and rising inflationary pressures," said Rebecca Patterson, a currency strategist at J.P. Morgan in New York.
Interest rate futures markets showed investors' expectations the Fed will raise rates in August dropped to a 52 percent chance after the data was released from 70 percent as the softer-than-expected job gains suggested a cooling economy. This then ended the day at 62 percent after markets turned their focus to the wage gains.
U.S. Treasury debt prices rose after the report indicated the labor market was weaker than forecast.
Markets were surprised by the soft employment number, which came after many economists had raised their expectations of job growth on Wednesday. The median estimate in a Reuters poll rose to 185,000 jobs, up from an earlier forecast of 155,000, after a private sector survey called the ADP National Employment Report said private-sector employers created an estimated 368,000 jobs in June.
"The bond market moved up because it was primed for a much bigger payroll number which did not materialize," said Pierre Ellis, senior economist at Decision Economics in New York.
Benchmark 10-year notes (US10YT=RR) rose 11/32 in price for a yield of 5.14 percent versus 5.18 percent before the jobs report and 5.19 percent late on Thursday.
Stocks slipped on worries that wage growth might be a sign of inflation pressures and had their worst one-day percentage slide in a month. The Dow Jones industrial average (.DJI) was down 142.88 points, or 1.27 percent, at 11,082.74.
The dollar sank to one-month lows against the euro and yen.
Average hourly earnings rose 8 cents, or 0.5 percent, while the average work week rebounded from a May dip to match a three-and-a-half year high struck in April, the report showed.
Hospitals, doctors' offices and residential care facilities added jobs in the month. Over the past year, 278,000 jobs have been added in health care, Labor Department statistics official Kathleen Utgoff said in a commentary.
Manufacturing added 15,000 jobs but construction shed 4,000 positions as the housing market cooled.
The Fed last week raised the benchmark federal funds rate target a 17th straight time to 5.25 percent. Policy-makers stressed at the time they would base their rate decisions on incoming economic reports and the outlook for growth and inflation.
The Fed will factor July's jobs report, among other data, into its decision August 8.
Fed Vice Chairman Donald Kohn said on Thursday he was aware there was a risk of going too far with interest-rate rises but that higher global credit costs were necessary to maintain price stability after a long period of easy money.
The U.S. economy has slowed since the first quarter as higher gasoline prices, rising borrowing costs and a slowdown in house price appreciation made Americans more cautious about spending.
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