June jobs growth higher than expected

June jobs growth higher than expected
By Eoin Callan in Washington
Copyright The Financial Times Limited 2007
Published: July 6 2007 14:30 | Last updated: July 6 2007 16:27



US employers created more jobs than anticipated over the last three months, according to fresh government figures which suggest a turnround in the American economy.

The department of labour said on Friday that payrolls swelled by 132,000 in June and that 75,000 more jobs were created in the previous two months than initially thought. The unemployment rate held steady close to a six-year low at 4.5 per cent.

The surprisingly strong job creation over the last three months suggests US economic growth has recovered after a slowdown in the first quarter, when the economy expanded by 0.7 per cent - the weakest pace in more than four years.

Nigel Gault, an economist at Global Insight, said the pace of hiring ”adds to the evidence that the economy bounced back in the second quarter”.

The signs of renewed economic activity prompted investors to price in a lower likelihood of an interest rate cut, as they pushed the benchmark 10-year Treasury note to its biggest weekly decline in a year.

Interest rate futures suggested traders saw only a 9 per cent chance of a reduction in rates, a dramatic reversal from only seven weeks ago when market prices suggested a near-100 per cent chance of a cut.

The Federal Reserve – which held interest rates at 5.25 per cent last week – has differed from many market participants in recent months by consistently indicating it is less concerned about growth and more worried that a tight labour market could stoke inflation.

The figures released by the labour department on Friday showed average hourly earnings rose 6 cents or 0.3 per cent last month, indicating modest upward pressure on wages.

Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech that keeping rates on hold was the best route to faster growth and slower inflation.

”The virtues of this path are that it avoids exposing the economy to unnecessary risk of a downturn while, at the same time, it is likely to produce enough slack in goods and labor markets to relieve inflationary pressures,’’ she said.

Ms Yellen said recent market movements meant investors and the Fed ”have become more closely aligned, sharing the view that growth in the US is, and is likely to remain, healthy.’’

Ms Yellen indicated that policymakers’ concerns about business investment had receded but added that increased premiums on riskier assets ”could pose a downside threat to the global economy”.

Wall Street economists, meanwhile, were surprised by continued hiring in the construction sector seen in Friday’s figures as housebuilders added 12,000 workers despite a prolonged housing market slump.

But they also pointed to signs of potential economic weakness, as the retail sector cut 24,000 positions.

Economists at Capital Economics said the decline in retail jobs ”suggests that higher gasoline prices are now beginning to have a more marked negative impact on consumer spending”.

Fears about the impact of gas prices on consumer sentiment were underlined as crude prices hit an 11-month high of $75 a barrel.

Economists also said an unwelcome percentage of last month’s hiring was attributable to state and local governments, which added 40,000 staff and are not viewed as good indicators of economic activity.

The bulk of the hiring was in the service industries, as employers such as banks, hospitals, restaurants, added 135,000 workers last month after hiring 199,000 workers in May.