Jobless rate in U.S. rises to 4.1 percent

Stock markets hail report seen as sign economy is cooling

116,000 private jobs cut

Investors hope Fed will see cause to stop raising interest rates

June 03, 2000|By William Patalon III | William Patalon III,SUN STAFF

The U.S. jobless rate unexpectedly jumped to 4.1 percent in May as the nation's businesses cut 116,000 jobs - the worst showing in nine years and the best evidence yet that the American economy has eased off its breakneck pace of early this year.

Stocks surged in response to the unemployment report, released yesterday by the Labor Department, with investors reasoning that signs of weakness in the still-strong economy will induce the Federal Reserve to slow - or halt - its interest-rate increases.

In turn, that would enable the record nine-year economic expansion to continue.

"A report like this one invariably is taken by the market as a positive," said Gary Thayer, chief economist for A. G. Edwards in St. Louis. "It means either that the Fed is done, or that the Fed doesn't have a lot more to go."

The Dow Jones industrial average rose 142.56 points, or 1.34 percent, to end the day at 10,794.76. And the Nasdaq composite index capped off the best week in its 29-year existence by soaring 230.88 points, finishing the day and the week at 3,813.38.

The Nasdaq's 6.4 percent gain was its fifth-best ever; the technology-laden index had its best-ever gain - 7.9 percent - Tuesday.

For the week, the Nasdaq gained 19 percent - nearly doubling its previous record of 9.7 percent, established the week ended April 21.

Yesterday's big gain dropped the Nasdaq's year-to-date loss to 6.1 percent, though it remains 24 percent below its all-time high, set March 10.

"This is a market that's been dying for good news," said Ned Brines, portfolio manager for Roger Engemann & Associates in Pasadena, Calif. "There's a lot of cash that's been on the sidelines waiting for the bleeding to stop."

The Fed has boosted short-term interest rates six times since late last June, including an aggressive, half-point increase May 16.

The central bank's policy-making committee, which sets interest rates, meets for two days late this month and for one in August.

As late as last week, many economists were predicting rate increases after one - if not both - of the meetings. In the past several days, however, economic reports suggest that the economy might finally be slowing under the weight of steeper rates.

In a separate report released yesterday, the Commerce Department said that factory orders for U.S. goods in April endured their steepest drop in a decade.

Factory orders unexpectedly fell 4.3 percent in April, after climbing 2.7 percent in March.

Though that report seems to show that the U.S. manufacturing sector's anemic recovery has been stymied - at least temporarily - it was still viewed as a positive by investors, who more than anything want the Fed to stop boosting rates.

Higher rates can be bad for stocks - for several reasons. As rates rise, so do borrowing costs for most companies, crimping profits and usually sending share prices down.

The higher short-term interest rates go, the more volatile stocks become - and the more attractive investments such as money-market accounts and certificates of deposit become to risk-averse investors.

As investors trade out of stocks, share prices can get pummeled.

Many stocks have dropped sharply from highs set at the beginning of the year, meaning that investors and economists have lately been subjecting each new economic report to hawk-like scrutiny, hoping to see signs of weakness in an economy that has grown at better than a 5-percent clip for three straight quarters.

That's why the Labor Department's report on the May jobless rate attracted so much attention.

"The report was a major surprise because it was so weak," said Joel Naroff, president of Naroff Economic Advisors in Holland, Pa.

After dropping from 4.1 percent in March to a three-decade low of 3.9 percent in April, the U.S. unemployment rate bounced back up to 4.1 percent last month - indicating the rate increases were affecting their intended targets.

Wages also rose less than expected.

That's key, since wages are an employer's largest expense, and since Fed Chairman Alan Greenspan has expressed fear that a tight labor market would lead to markedly higher wages - and, through that, inflation.

Instead, the Labor Department report showed, average hourly earnings rose only 0.1 percent, or a penny an hour, to $13.56 last month. That followed a 0.4 percent increase in April.

What's more, the business sector in May recorded its first drop in jobs since January 1996, and the largest since November 1991.

Overall, the payroll ranks climbed by 231,000. But the government sector - hungry for workers for the 2000 census - added 357,000 jobs, which at first obscured the private-sector decline of 116,000 jobs, the report said.

Wire reports contributed to this article.

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