Job growth stumbles again, raising pressure on Fed

WASHINGTON (Reuters) - Job growth braked sharply for a third straight month in May and the jobless rate rose for the first time in nearly a year, raising chances of further monetary stimulus from the Federal Reserve to nurse the sputtering recovery.

Employers added a paltry 69,000 jobs to their payrolls last month, the least since May of last year, and 49,000 fewer jobs were created in the prior two months than had been thought, the Labor Department said on Friday.

The report is troubling for President Barack Obama, whose prospects of winning re-election in November could hinge on the health of the economy. Republican opponent Mitt Romney called the report "a harsh indictment" of Obama's policies.

The jobless rate rose to 8.2 percent from 8.1 percent in April, although the increase reflected people entering the labor force to look for work, a possible sign of growing confidence.

The data was clearest evidence yet that the deepening debt crisis in Europe and a slowdown in China were starting to dampen an already lackluster U.S. recovery. Concerns over the course of U.S. fiscal policy may also be starting to weigh.

"The U.S. is not an island. What happens abroad matters here," said Diane Swonk, chief economist at Mesirow Financial in Chicago. "It is difficult for anyone to commit to hire when growth remains subdued and our fiscal problems both at home and abroad appear to be compounding."

Data from other major economies was similarly worrying. Chinese factory output barely rose in May and manufacturing activity in Britain shrank at its fastest pace in three years. Earlier reports had shown factory activity also declined in Germany and France.

U.S. stocks, already on the ropes due to a steady diet of troubling news out of Europe, were trading down more than 2 percent at mid-day, and the Dow Jones industrial average entered into negative territory for the year.

Investors rushed into the safety of U.S. 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 broadly weak payrolls report raised the odds of the Fed launching a third round of bond purchases or expanding on other efforts to push borrowing costs lower. But many economists said it was unlikely the U.S. central bank would pull the trigger at its upcoming policy meeting on June 19 and 20.

"There's clearly less (economic) momentum than Fed participants had anticipated," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. "We expect the Fed will probably try to keep pumping in stimulus in some form in the second half of the year."

"DEVASTATING NEWS"

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.

Some economists say there is not much the Fed can do and want fiscal policy to take up the slack, an unlikely proposition given opposition to increased government spending and sharp election-year political divisions.

Speaking to workers at a Honeywell plant in Golden Valley, Minnesota, Obama pressed Congress to act on an economic "to-do" list that includes tax incentives for businesses to hire more workers and an effort to help homeowners refinance mortgages.

"We've got responsibilities that are bigger than an election," he said. "My message to Congress is now is not the time to play politics. Now is not the time to sit on your hands."

LOSING MOMENTUM

The jobs numbers cast doubt on whether the economy has enough momentum to achieve the 2 percent to 2.5 percent growth rate analysts expected this year.

Still, the wheels are not falling off the recovery.

The Labor Department's survey of households, which tends to be volatile from month to month, showed robust jobs growth in May, although the number of Americans working full time fell.

Separately, a report on the U.S. factory sector showed activity slowed but still expanded in May, with new orders reaching their highest point in more than a year.

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

Some economists said the weak reading on jobs growth for May suggested a more fundamental slowdown in the economy.

Others were not convinced, saying the strength of hiring in the winter still largely explained the weak jobs growth last month. They cited persistent job losses in construction, despite a rise in home building, and weak employment in leisure and hospitality - all weather-sensitive industries.

"I am disappointed in the data, but it's not the end of the world," said Ray Stone, an economist at Stone & McCarthy Research Associates in Princeton, New Jersey.

Analysts say the economy needs to create roughly 125,000 jobs a month just to keep the unemployment rate steady. The level of employment is about 5 million jobs below where it stood in December 2007, when the economy fell into recession.

About 23.2 million Americans were either out of work or underemployed in May. Last month, the private sector added 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)