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06/01 12:15

U.S. Economy: May Jobless Rate 4.4%; NAPM Index Drops (Update2)

By Carlos Torres and Siobhan Hughes

Washington, June 1 (Bloomberg) -- U.S. companies cut fewer jobs than expected in May, unemployment dropped to 4.4 percent and business at factories declined, suggesting manufacturing continues to slide as the rest of the economy holds up.

Payrolls fell 19,000 after decreasing 182,000 in April and the jobless rate fell from 4.5 percent, the Labor Department said. The largest drop in factory employment in almost three years outweighed increases in construction and financial jobs.

A slump in manufacturing has led the recent slowdown in the U.S. economy and shows little sign of improving as companies such as DuPont Co. cut jobs to reduce costs. Business at factories contracted in May for a 10th consecutive month, according to a survey by the National Association of Purchasing Management.

``Manufacturing is quite a bit worse off than we thought, but the rest of the economy is pulling some of the slack,'' said Vincent Boberski, chief economist at Dain Rauscher Investment Services in Chicago.

The factory report sparked investor optimism that Federal Reserve policy makers might not limit future interest rate reductions as they try to boost growth. The U.S. Treasury's 10- year note rose 3/16 point, pushing down its yield 3 basis points to 5.35 percent.

Stocks were mixed. The Dow Jones Industrial Average fell 7 points, or 0.1 percent, and the Nasdaq Composite Index rose 21 points, or 1 percent.

Fed Policy

Fed policy makers have signaled their concern that a rise in firings may cause consumers to slow spending and constrain economic growth. ``If a pattern of job losses emerges, and it is significant enough to undermine consumers' willingness to spend, this would pose a clear risk to the economy's prospects,'' Anthony Santomero, president of the Philadelphia Fed, said in a speech last week.

Dallas Fed President Robert McTeer said yesterday that the jobless rate may rise further. ``It would be unusual for unemployment to go up as it has and suddenly stop,'' McTeer said in a speech to Texas Tech University's College of Business Administration. ``I think it will go up a little bit more.''

Economic growth cooled to a 1.4 percent annual pace between October and March, the slowest six-month period since the second and third quarter of 1991 when the economy was emerging from the last recession. To boost growth, Fed policy makers have lowered their target for the overnight bank-lending rate by 2 1/2 percentage points this year to a seven-year low of 4 percent.

Wage Growth

One reason central bankers have been able to cut rates so much is that inflation has remained in check. Today's jobs report showed average hourly earnings rose 0.3 percent, or 4 cents, to $14.26 last month from $14.22. Earnings rose 0.4 percent in April.

Analysts had expected a May jobless rate of 4.6 percent and a decrease of 50,000 jobs, according to a Bloomberg News survey. The drop in unemployment was partly due to a half-million-worker decrease in the civilian labor force.

The government's monthly job growth figures are based on statistics provided by businesses, while the unemployment rate is based on a survey of U.S. households.

The Labor Department revised its payrolls statistics back to 1996. Along with change in the adjustment for seasonal influences, the revised data also include up-to-date unemployment insurance tax records that are filed by businesses with the government.

Factory employment fell by 124,000 in May, the 10th straight monthly decrease and the largest since a 173,000 plunge in July 1998, when General Motors Corp. workers went on strike.

Services

Service-producing employment -- which includes government hiring -- rose 70,000 after rising 6,000 a month earlier. Construction jobs increased 31,000 and finance, insurance and real- estate companies added 22,000 workers.

Jobs at retailers fell 5,000 in May after rising 61,000 in April.

The slowing economy has prompted companies to alter their hiring plans. A survey of 16,000 U.S. companies by Manpower Inc. showed 27 percent plan to add workers between July and September, down from 35 percent a year earlier. The share planning to reduce staff rose to 9 percent from 5 percent a year earlier, according to the private employment agency's survey, released last week.

Dupont, the second-largest U.S. chemical maker, announced today it will cut more jobs than anticipated in April as demand slows for consumer and industrial products. Dupont said eight weeks ago that it planned to reduce its workforce by 4,000, or 4 percent, and to cut 1,300 contract workers. The company will provide more detail when they announce second quarter results.

Semtech Corp.

Computer and telecommunications companies are among the manufacturers most affected by slowing demand. Today's report showed payrolls fell 3,000 at manufacturers of computers and office equipment. Semtech Corp., which makes semiconductors for Dell Computer Corp. and Cisco Systems Inc., said last week it will fire up to 13 percent of its staff because customers are ordering fewer computer chips.

This marks the second time in six months that the California- based company reduced its workforce amid slowing demand for personal computers and communications equipment. Semtech cut its staff by 17 percent in the first quarter.

``Semtech, along with the entire semiconductor industry, is experiencing one of the most severe downturns in recent memory,'' said Jack Poe, the company's chief executive officer in a statement. ``A further reduction in head count and inventory are necessary steps.''

NAPM's manufacturing index dropped to 42.1 last month from 43.2 in April. A reading below 50 signals contraction, and the index hasn't strayed above that point since July. The indexes measuring new orders and production fell. Manufacturing accounts for one-fifth of the U.S. economy.

``It'll take time for inventories to be depleted and demand to pick up, so both from a supply and demand perspective it is going to take time for this weakness to run its course,'' said Richard Yamarone, senior economist at Argus Research Corp. in New York. ``The shelves have to be emptied before new production can begin.''

Business Spending

Business spending also remains lackluster. ``Demand in the U.S. is still less than we expected,'' Sun's Chief Financial Officer, Mike Lehman, said on a conference call this week. Much of Sun's success last year came from courting Internet-related startups and telecommunications customers. Startups now are selling barely used Sun equipment to raise cash and sustain operations.

A positive sign for manufacturing is that automakers, which cut production in the first quarter, have boosted production this quarter. Ford Motor Co., the second-largest automaker, was planning to make 1.19 million vehicles this quarter, up from 1.05 million in the first three months of 2001.

And Brocade Communications Inc. Chief Executive Gregory Reyes said in a May 16 interview with Bloomberg Television that the largest maker of computer-system switches has ``seen a big, big change in activity in the last 90 days where companies are spending again.''

-- (M@rket.trends), June 01, 2001