Unemployment Rate Drops Unexpectedly to 5.8 Percent

The nation's unemployment rate edged down to 5.8 percent in May, the first drop in three months, offering a glimmer of hope for the downtrodden job market. 

The Labor Department reported Friday that the rate fell 0.2 percentage points last month from an eight-year high of 6.0 percent in April. 

But even amid a recovery in the broad economy, businesses remained wary of hiring aggressively. The number of workers on U.S. payrolls outside the farm sector grew by 41,000, the biggest gain in 15 months — but still smaller than the 58,000 increase forecast by private economists.

Also, the number of people unemployed for 27 weeks or longer continued to rise by 142,000 to 1.6 million. Those long-term jobless comprised about 20 percent of total unemployment in May — nearly double from a year earlier. 

"It's a tale of two surveys," said Alan Ruskin, research director at 4Cast Ltd. in New York. "The nonfarm payroll number is weaker than expectations. You want to place more emphasis there than on the household survey, which is a much smaller survey and generates the unemployment rate data."

"This is consistent with the Federal Reserve delaying a hike in interest rates beyond August and maybe even beyond September," Ruskin said.

The economy is emerging from last year's recession, but the job market has been unable to support the number of people looking for jobs, causing the unemployment rate to hover near 6.0 percent for months. 

Economists say companies are worried about the recovery's staying power and are reluctant to quickly hire back workers, crank up spending and make other big commitments until they are convinced the turnaround is for real. 

Against such a backdrop of sluggish job growth, economists project the unemployment rate will climb as high as 6.5 percent this summer. 

Citing uncertainties about the vitality of the unfolding recovery, the Federal Reserve has left short-term interest rates unchanged at 40-year lows. 

The specter of rising unemployment and a belief that consumers won't have a lot of pent-up demand coming out of the recession were factors in the Fed policy-makers' decision to hold rates steady. Many economists predict the Fed will leave rates unchanged through the summer. 

Low rates might motivate consumers, whose spending accounts for two-thirds of all economic activity in the United States, to keep on spending and businesses to step up investment. That eventually would trickle down to the jobs market. 

In Friday's report, the number of people in the labor force was little changed in May at 142.8 million. 

Employment in the services industry — normally the engine of job creation in the country — increased by 68,000 last month following similar gains in the previous two months. 

Hiring at temporary employment firms has contributed to the increase of services jobs. Those firms added 25,000 jobs in May for a gain of 126,000 since February. The industry lost 806,000 jobs from September 2000 through February 2002. 

Economists are watching hiring at such firms because companies often tap temporary workers before they take on new full-time employees or rehire laid-off workers. 

Engineering and management services added 23,000 jobs in May — mostly in management and public relations. 

In retail, job losses in restaurants and bars totaled 33,000. Employment was unchanged in transportation and public utilities following losses of 347,000 since February 2001. 

In government, employment in local education increased by 26,000 — which helped offset job losses in state government. 

Manufacturing companies — which have been battered for more than a year — cut 19,000 jobs last month. But losses have moderated substantially since the beginning of the year. Employment had declined by an average of 115,000 a month from March 2001 through January 2002. 

Reuters and the Associated Press contributed to this report.