Day of economic shocks for the US
Jobless rate, oil prices soar; Dow tumbles
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An unexpected surge in the national unemployment rate set off shock waves that washed over financial, currency, and oil markets yesterday and delivered another blow to hopes that the sliding US economy would soon begin to rebound.
The Labor Department reported yesterday that the jobless rate leaped half a percentage point to 5.5 percent in May, the biggest one-month jump since 1986. Employers, meanwhile, cut payrolls for the fifth consecutive month, shedding nearly 50,000 jobs in May.
The increase in joblessness quickly dashed tenuous optimism taking root among investors that the worst might be over for the struggling economy. Recent government and industry reports showed economic growth, manu facturing activity, and retail sales doing better than expected. Stock prices were rising, and oil prices retreating. Some economists even suggested that the housing market might start to stabilize.
By the time markets closed yesterday, little optimism remained. The Dow Jones industrial average plunged nearly 400 points, its worst one-day drop in 15 months. The dollar fell another 1 percent against the euro, and oil prices soared nearly $11 a barrel to close at a record $138.54.
"We're in for a bad several months," said Scott Anderson, senior economist at
And there's not much more the Federal Reserve can do about it, economists said. Despite deteriorating labor markets and a foundering economy, rising inflation makes it unlikely the Fed will cut interest rates when policy makers meet this month. Lower interest rates can boost the economy by encouraging consumers to borrow and spend.
But when inflation is rising, the additional demand created by lower rates can push prices higher. Many economists blame the runaway inflation of the 1970s on the Fed keeping rates too low for too long.
In a speech at Harvard University this week, Fed chairman Ben Bernanke said the Fed has learned the lessons of the 1970s, which analysts said signals a shift in focus from stimulating the economy to fighting inflation. Some analysts had predicted the Fed would start boosting rates later this year to hold down inflation.
But the deterioration in the labor markets makes any increase unlikely any time soon, economists said. "The Fed is in a very tricky position," said Nigel Gault, US economist at Global Insight, a Waltham forecasting firm. "Growth is poor and the economy is fragile, but inflation is a problem."
Meanwhile, a spokesman for President Bush said the president is considering additional measures to stimulate the economy on top of the $168 billion stimulus plan approved earlier this year. Representative Barney Frank, a Newton Democrat and the chairman of the House Financial Services Committee, called on Bush to act swiftly and join Congress in enacting a package that would include money to help state and local governments avoid budget cuts, help the unemployed, and rehabilitate foreclosed properties.
Economists had expected the unemployment rate to rise, but the size of the jump, largely driven by a surge in teenagers seeking jobs, caught them by surprise. Many suggested the data, which can fluctuate from month to month, overstated the extent of joblessness in May.
Still, economists said, it's clear the labor market is weakening. "The trend may not be up a half-percent, but it's clearly up," said James O'Sullivan, economist at UBS AG in Stamford, Conn.
The weak economy, meanwhile, is hurting the value of the dollar against other currencies. Since the Fed is keeping interest rates low to boost the economy, investors are putting money into denominations that pay higher rates. Yesterday's employment report makes it unlikely the Fed will boost rates any time soon, analysts said, so the dollar fell again.
That helped send oil prices soaring. Oil trades in dollars, and when the dollar falls, producers demand higher prices to make up for the loss in value. A lower dollar also reduces prices for buyers holding stronger currencies, boosting demand and pushing prices even higher.
Also contributing to oil's surge: a forecast by Wall Street firm Morgan Stanley that oil prices would rise to $150 and a report of new tensions between Israel and Iran over Iran's nuclear program.
That's more bad news for already tapped-out consumers, who drive about 70 percent of the economy.
"Oil is not coming down any time soon," said Jay Bryson, global economist at Wachovia Corp. in Charlotte, N.C. "It's feeling pretty bad right now, and I don't think that changes anytime soon."
Robert Gavin can be reached at rgavin@globe.com. Material from Globe wires services was used in this report. 
