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U.S. unemployment dips
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June 1, 2001: 12:00 p.m. ET
Jobless rate unexpectedly drops to 4.4%, but manufacturing still weak
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NEW YORK (CNNfn) - The U.S. unemployment rate edged lower in May, the government said Friday, showing the labor market was a bit stronger than expected, while a key indicator of manufacturing strength was worse than expected last month.
The unemployment rate fell to 4.4 percent from 4.5 percent in April, the Labor Department reported, compared with Wall Street forecasts for a rate of 4.6 percent. It was the first decline in the jobless rate since September.
Meanwhile, payrolls fell by 19,000 jobs outside the farm sector after businesses shed a revised 182,000 jobs in April, the department said. Economists polled by Briefing.com expected 25,000 job cuts.
In a separate report, the nation's purchasing managers said their index of manufacturing activity fell to 42.1 in May from 43.2 in April. The reading was weaker than forecasts of 43.7.
A reading below 50 from the National Association of Purchasing Management indicates contraction in manufacturing, which accounts for about a fifth of the nation's economy. The index has been below 50 for 10 straight months.
"I don't think there are many signs for optimism," said Norbert Ore, chairman of NAPM's business survey committee. "We are not going to get a quick bounce out of this as people once thought."
Many economists said the manufacturing weakness would encourage the Federal Reserve to cut interest rates for the sixth time this year to boost the ailing U.S. economy. The Fed already has slashed short-term rates from 6.5 percent to 4 percent this year.
"Some of the headline (jobs) numbers maybe look slightly stronger than expected, but when you scratch below the surface, you find there is still plenty of weakness out there," said Alan Ruskin, research director at 4Cast Inc. "Obviously the manufacturing sector is looking as weak as ever."
Still, the strength in the jobs data may make the Fed less aggressive when it meets to discuss rate policy on June 26 and 27.
"My gut says the Fed doesn't have too many bullets left to fire, and therefore they have to use them sparingly, and we'll see a (quarter percentage point) cut at the next meeting," Ruskin said.
Interest-rate-sensitive U.S. Treasury bond prices fell after the jobs data were released, but rebounded after the NAPM release. Stocks were mixed in early trading.
Report reflects revisions
April's employment report was revised significantly after the government changed its method of counting payrolls and found more jobs were created than originally reported in the past 12 months. The revisions tempered economists' enthusiasm about the data.
"The numbers are a little better than we expected," said Peter Kretzmer, senior economist with Banc of America Securities. "Still, these things bounce around, and I think we'll probably see the unemployment figure break 4.5 percent next month," Kretzmer said.
The government also said average hourly wages rose 4 cents to $14.26, in line with forecasts.
May's decline in unemployment was the first drop since September, when the jobless rate fell to a 30-year low of 3.9 percent. Unemployment has risen steadily ever since, as job cuts have accumulated in the wake of a slowing economy.
Though at first glance it seems impossible for the unemployment rate to fall while job cuts rise, as happened this month, the discrepancy is partially explained by the fact that the actual labor force -- the proportion of the population 16 years of age and older who are either working or looking for work -- shrank by nearly 500,000 people in May.
The Bureau of Labor Statistics has no data to explain why the work force shrank so drastically, but economists had their guesses.
"Unemployment is down because a lot of people have stopped looking for jobs, and therefore don't count as unemployed," said Bill Cheney, chief economist with John Hancock Financial Services Inc.
Manufacturing still weak
The government's revised jobs data showed that instead of declining, payroll jobs rose by 59,000 in March and fell far less than previously reported in April.
There was a rebound in hiring in the service sector, where 70,000 new jobs were created last month, a far better showing than the small gain of 6,000 jobs in April. But manufacturing continued to suffer, losing an additional 124,000 jobs in May, the biggest drop since July 1998.
Since July, manufacturers have laid off 675,000 workers as they struggled to cope with shrinking demand and a rising backlog of unsold goods. More than two-thirds of the factory layoffs have occurred since December.
Click here for more on job cuts
Economists are concerned that the weakness in manufacturing could spread to the rest of the economy, especially if the layoff notices cause consumers, who account for two-thirds of total economic activity, to cut spending.
"If you're making fewer things, then you need fewer people to transport them, and fewer people to finance them, and fewer people to distribute them down the line," said Carol Stone, deputy chief economist at Nomura Securities International. "So it's important, and it's key to the current state of the economy."
In a separate report, the government said construction spending rose 0.3 percent in April to a record $855.2 billion annual rate, following a revised 1.1 percent gain in March. April's gain was slightly above economist expectations of a 0.2 percent gain, according to Briefing.com. 
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