US employers hired workers at the fastest clip in more than two years last month, pointing to a rebound in economic growth after a dreadful winter and keeping the US Federal Reserve on track to end bond purchases this year.
However, the brightening outlook was tempered somewhat by a sharp increase in the number of people dropping out of the labor force, which pushed the unemployment rate to a five-and-a-half-year low of 6.3 percent. Wage growth also was stagnant.
Non-farm payrolls surged 288,000 last month, the Labor Department said on Friday. That was their largest gain since January 2012 and beat economists’ expectations for only a 210,000 rise.
“It lends significant legitimacy to the positive tone in the wide array of post-February economic reports, which have all been consistently pointing to a significant pickup in economic growth momentum this quarter,” said Millan Mulraine, deputy chief economist at TD Securities in New York.
March and February’s data was revised to show 36,000 more jobs than previously reported.
About 806,000 people dropped out of the labor force last month, unwinding the previous months’ gains. That helped to push down the unemployment rate 0.4 percentage point to its lowest level since in September 2008.
However, overall the data suggested the economy was gathering strength and led investors to pull forward their bets on when the Fed will start to raise interest rates.
The strong payrolls growth added to upbeat data, such as consumer spending and industrial production, in suggesting that sputtering growth in the first quarter was an aberration, weighed down by an unusually cold and disruptive winter.
The Fed on Wednesday shrugged off the dismal first-quarter performance. The US central bank, which announced further reductions to the amount of money it is pumping into the economy through monthly bond purchases, said indications were that “growth in economic activity has picked up recently.”
“It also matches well with the Fed’s expectations for the labor market, excluding the sharp unemployment rate drop, and likely means more US$10 billion dollar reductions in monthly asset purchases at future meetings,” said Scott Anderson, chief economist at Bank of the West in San Francisco.
Economists expect second-quarter GDP to top a 3 percent pace. Last month’s drop in the labor force could have been driven by some of the 1.35 million people who lost their longer-term unemployment benefits at the end of last year.
Since they are no longer receiving unemployment benefits, they have little incentive to continue looking for work, as required by law.
“Baby boomers are retiring and the various government benefits, including disability, are contributing to the drop in the participation rate,” said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California.
Still, there is little doubt the labor market is strengthening. A broad measure of unemployment, which includes people who want to work, but have stopped looking and those working only part time, but who want more work, fell to a 20-year low of 12.3 percent last month. It was at 12.7 percent in March.
Despite the strong gains, average hourly earnings were flat last month, pointing to lack of wage pressure and still ample slack in the economy.
“There is just no sign of any broad-based wage pressure,” said Josh Feinman, chief global economist at Deutsche Asset & Wealth Management in New York.
“There is still slack in the labor market and with labor costs still dead in the water, the Fed is probably not going to have to rush [to raise rates],” he added.
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