Jobless rates jumps to 5.5 percent — biggest rise since '86

WASHINGTON — The nation's unemployment rate jumped to 5.5 percent in May — the biggest monthly rise since 1986 — as nervous employers cut 49,000 jobs.

The latest snapshot of business conditions showed a deeply troubled economy, with dwindling job opportunities in a time of continuing hardship in the housing, credit and financial sectors.

"It was ugly," said Richard Yamarone, economist at Argus Research.

With employers worried about a sharp slowdown and their own prospects, they clamped down on hiring in May, said Friday's report from the Labor Department. The unemployment rate soared from 5 percent in April to 5.5 percent in May. That was the biggest one-month jump in the rate since February 1986. The increase left the jobless rate at its highest since October 2004.

On Wall Street, stocks slid. The Dow Jones industrials tumbled more than 200 points in morning trading.

The big jump in the unemployment rate surprised economists who were forecasting a tick-up to 5.1 percent. Payroll losses, however, weren't as deep as the 60,000 that analysts were bracing for. Still, job losses in both March and April turned out to be larger than the government previously reported. Employers now have cut payrolls for five straight months.

The White House expressed disappointment, too.

"Certainly this isn't a report that we wanted to see today," White House deputy press secretary Scott Stanzel said. He acknowledged that the increase was higher than experts expected. "It is a number that is too high in our view but it is lower than the average of the last three decades."

The 5.5 percent rate is relatively moderate judged by historical standards. Yet, there was no question that employers last month sharply cut jobs in manufacturing, construction, retailing and professional and businesses services. Those losses swamped gains elsewhere, including in the education and health fields, government, and leisure and hospitality.

The government said the number of unemployed people grew by 861,000 in May — rising to 8.5 million. The over-the-month jump in unemployment reflected more workers losing their jobs as well as an increase in those coming into the job market — especially younger people — to look for work, the Bureau of Labor Statistics said.

A year ago, the number of unemployed stood at 6.9 million and the jobless rate was 4.5 percent.

A trio of crises — housing, credit and financial — have rocked the economy. That's caused economic growth to slow to a crawl as businesses and consumers have tightened their belts. Spiraling energy costs are another negative force.

The country's economic problems are a top concern for voters — and thus for President Bush, lawmakers on Capitol Hill and those vying to win the White House this fall.

And, there's been a lot of talk about whether the economy is on the brink of, or fallen into, its first recession since 2001. That determination, made by a panel of academics, is usually made well after the fact.

"For the average American there is not debate that the economy is in a recession," said Mark Zandi, chief economist at Moody's Economy.com. "That's because their net worth is lower, their purchasing power is lower and it is tough to find a job. If you lose a job, it is tough to get back in," he said.

So far this year, the government said, job losses have totaled 324,000.

Workers with jobs, however, saw modest gains.

Average hourly earnings for jobholders rose to $17.94 in May, up 0.3 percent from the previous month. Economists were forecasting a 0.2 percent gain. Over the last 12 months, wages have grown by 3.5 percent..

With food and energy prices marching upward, paychecks aren't stretching as far. Although tax rebates helped to energize shoppers and give major retailers better sales in May, analysts still believe that anxious consumers will be keeping a close watch on their purchases and their budgets in the months ahead. A weakening job market could make people feel less inclined to spend, which would put a damper on overall economic growth.

Worried about inflation, Federal Reserve Chairman Ben Bernanke has signaled that the central bank's rate-cutting campaign, which commenced last September to help bolster the economy, is probably over for now.

Fed officials and the Bush administration are hoping that the Fed's powerful doses of rate reductions and the government's $168 billion stimulus package, including tax rebates for people and tax breaks for businesses, will pull the economy out of its deep funk in the second half of this year.

Even if that happens, the unemployment rate is expected to climb to 6 percent or higher early next year. Employers won't want to ramp up hiring until they feel more sure that an economic recovery has strong legs.