Employers add 175K jobs; unemployment at 7.6 percent

WASHINGTON -- The U.S. economy added 175,000 jobs in May -- a steady pace that shows strength in the face of tax increases and government spending cuts if not enough to reduce still-high unemployment.

The unemployment rate rose to 7.6 percent from 7.5 percent in April, the Labor Department said Friday. The rate rose because more people began looking for work, a healthy sign, but only about three-quarters found jobs.

Analysts said the less-than-robust job growth likely would lead the Federal Reserve to maintain the pace of its monthly bond purchases for a few more months. The bond purchases have been intended to ease long-term borrowing costs and lift stock prices.

Investors appeared pleased by the evidence that job growth remains steady. The Dow Jones industrial average was up about 207 points at the close of Friday's trading.

Friday's job figures provided further evidence of the U.S. economy's resilience. The housing market is strengthening, auto sales are up and consumer confidence has reached a five-year peak. Stock prices are near record highs, and the budget deficit has shrunk.

The U.S. economy's relative strength contrasts with that of Europe, which is gripped by recession, and Asia, where once-explosive economies now are struggling.

Many analysts expect the U.S. economy to strengthen later this year.

"Today's report has to be encouraging for growth in the second half of the year," Dan Greenhaus, an analyst at BTIG LLC, said Friday.

Employers have added an average of 155,000 jobs the past three months. But the May gain almost exactly matched the average increase of the previous 12 months: 172,000.

Americans appear more optimistic: 420,000 people started looking for work in May. As a result, the percentage of Americans 16 and older either working or looking for work rose to 63.4 percent from a 34-year low 63.3 percent in April.

This is called the labor force participation rate. Higher participation can boost the unemployment rate. That's because once people without a job start looking for one, they're counted as unemployed.

Labor force participation has been falling since peaking at 67.3 percent in 2000. That's partly the result of baby boomers retiring and dropping out of the work force.

Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, thinks an improving job market will encourage more Americans to look for jobs. He predicts the participation rate will level off at around 63.5 percent.

The unemployment rate is derived from a survey of households. This survey found more people started looking for work in May. Since some didn't find jobs right away, the number of unemployed rose 101,000 to 11.7 million.

The job gain for the month is calculated from a separate survey of employers.

Some signs in the report suggested the government spending cuts, which began taking effect in March, and weak growth in much of the rest of the world are weighing on the U.S. job market. Manufacturers cut 8,000 jobs, and the federal government shed 14,000. Both were the third straight month of cuts for those industries.

The number of temporary jobs rose about 26,000, the second straight month of strong gains. That suggests employers are responding to more demand but aren't confident enough to hire permanent workers.

Industries that rely directly on consumer spending hired at a healthy pace -- a sign of confidence that consumers will keep spending. Retailers added 28,000 jobs. Restaurants and hotels added 33,000.

These categories include many lower-paying occupations. By contrast, the recession sharply cut jobs in higher-paying industries such as manufacturing, construction and finance, which have yet to recover.

Mark Vitner, an economist at Wells Fargo, calculates that about 60 percent of the jobs created in May were in lower-paying fields. Even in a professional field such as health care, Vitner noted that one of the biggest job creators was home health-care services, where care providers earn about $10 an hour, according to government data.

"It's hard to get meaningful income growth with these types of jobs," Vitner said.

Rob McGahen, 29, has felt the trend personally. After receiving his master's degree in business administration in 2007, McGahen worked for Boeing in St. Louis, buying parts for military planes.

Last year, after moving with his wife to Pensacola, Fla., McGahen sought work for about nine months. He settled for a part-time job in the produce section of Publix, a supermarket chain.

Stock markets have gyrated in the past two weeks on speculation that the Fed would soon start to taper its $85 billion-a-month in bond buying -- a step that could raise rates and cause stock prices to fall.

"I think the Fed will stay on hold," said Nariman Behravesh, chief economist at IHS Global Insight. "They want to see numbers above 200,000 on payroll jobs on a consistent basis before they start to taper off."

Behravesh said he thinks the Fed will maintain its pace of bond buying through this year before scaling it back in 2014.

"Today's report is perhaps the perfect number for nervous investors," said James Marple, Senior Economist at TD Economics. "It is strong enough to point to continued economic recovery but not so strong as to bring forward expectations of Fed tapering."

Other analysts who have predicted that the Fed would start trimming its bond purchases later this year said they didn't think Friday's jobs report would change that timetable.

John Canally, an economist at LPL Financial, blames the Federal Reserve for not specifying how much monthly job growth it wants to see before it scales back its bond buying.

"They have not been transparent enough," Canally said. "That is what has unhinged markets."

The Fed has been buying bonds to keep loan rates near record lows to encourage consumers and companies to buy and spend.

Low rates make investments that pay interest unattractive. As result, many investors have bought stocks instead. Money pouring into stocks drove the Dow to record high last month. Stocks have since slipped but their peaks are still up more than 20 percent since November.

On Friday, the government also revised the job figures for April and March. The revisions were slight compared with recent months, when the government had significantly revised up its initial job estimates. April's gain was lowered to 149,000 from 165,000. March's was increased slightly to 142,000 from 138,000. The net loss was 12,000 jobs.

The average hourly wage ticked up just a penny in May, to $23.89. That was because much of the job growth was in lower-paying industries.

Mild inflation is boosting Americans' purchasing power. During the last 12 months, hourly wages have risen 2 percent. Inflation has increased just 1.1 percent in that time.

The economy grew at a solid annual rate of 2.4 percent in the first three months of the year. Consumer spending rose at the fastest pace in more than two years. Economists worry the steep government spending cuts and higher Social Security taxes that started Jan. 1 might be slowing growth in the April-June quarter to an annual rate of 2 percent or less.

Consumers appeared earlier this year to shrug off the tax increase. But in April, their income failed to grow, and they cut back on spending for the first time in nearly a year.

A Social Security tax increase is costing a typical household that earns $50,000 about $1,000 this year, or about $20 a week. For a household with two high-earners, it's costing up to $4,500.

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AP Economics Writer Martin Crutsinger contributed to this report.