WASHINGTON (Reuters) - May's headline U.S. employment number was awful but still leaves the Federal Reserve with an economy showing both evidence of full employment and signs that disappearing slack may warrant a rate hike soon, despite panicked reaction by investors who started to price out a summer rise after Friday's shock numbers.
The Fed was already seen as unlikely to move on rates in June. Friday's data on its own won't necessarily take a July rate hike off the table as policymakers look for other evidence of whether the economy is weakening, or merely following the trajectory they largely expect.
Fed officials since late last year have said job growth was bound to slow, and while the 38,000 payrolls gain was far below expectations it was influenced by one-time factors such as a telecommunications strike and a drop in construction that may have been linked to bad weather in May.
Meanwhile the jump in wages, the drop in the unemployment rate, and the decline in labor force participation are consistent with what policymakers have said they expect as the labor market tightens.
The most recent forecast from Fed officials projected the unemployment rate to dip to 4.7 percent by the end of the year, the level it reached last month.
All told the data "suggests that labor market slack continues to fall," said Mohamed el-Erian, chief economic adviser at Allianz (DE:ALVG).
The 15,000 decline in construction jobs "is likely to be an anomaly," said Russell Price, senior economist at Ameriprise Financial (NYSE:AMP) Services Inc., in Troy, Michigan.
The fall in the unemployment rate was partly the product of a decline in the size of the labor force, which fell by 458,000 workers between April and May.
That was largely the result of workers over 55 years of age and those without a high school diploma dropping out, a development that coincided with the downturn in oil and gas industry jobs and manufacturing more broadly.
Fed officials had been expecting the labor force participation rate to resume its longstanding and demographically driven decline, a trend considered far beyond the scope of monetary policy to address.