By Lucia Mutikani
WASHINGTON (Reuters) – U.S. job growth accelerated in May and the unemployment rate dropped to an 18-year low of 3.8 percent, pointing to rapidly tightening labor market conditions, which could stir concerns about inflation.
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The closely watched employment report on Friday also showed wages rising solidly last month, cementing expectations that the Federal Reserve will raise interest rates in June.
Nonfarm payrolls increased by 223,000 jobs last month, the Labor Department said. Data for March and April was revised to show the economy creating 15,000 more jobs than previously reported. Economists blamed bad weather for the slowdown in job growth over those two months.
Average hourly earnings rose eight cents, or 0.3 percent last month after edging up 0.1 percent in April. That lifted the annual increase in average hourly earnings to 2.7 percent from 2.6 percent in April.
The one-tenth of a percentage point drop in the unemployment rate pushed it to a level last seen in April 2000. The jobless rate is now at the Fed's forecast of 3.8 percent by the end of this year.
The strong employment report added to a string of solid economic data, including consumer spending and industrial production, that have suggested economic growth accelerated early in the second quarter after slowing at the beginning of the year.
The strong economy against the backdrop of a $1.5 trillion income tax cut package and increased government spending could fan price pressures. Inflation is running just below the Fed's 2.0 percent target.
Monthly job gains have averaged about 179,000 over the last three months, more than the roughly 120,000 needed to keep up with growth in the working-age population.
Economists polled by Reuters had forecast nonfarm payrolls increased by 188,000 jobs last month and the unemployment rate unchanged at 3.9 percent.
The U.S. central bank increased borrowing costs in March and forecast at least two more rate hikes for this year.
But much depends on financial market conditions, which have tightened in recent days following a political crisis in Italy and renewed fears of a trade war after the Trump administration imposed tariffs on steel and aluminum imports from Canada, Mexico and the European Union.
Though the labor market is viewed as being close to or at full employment, there is still some slack remaining. Some economists argue that the unemployment rate is overstating the strength of the jobs market.
The labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, fell to 62.7 percent last month from 62.8 percent in April. It has declined for three straight months.
Job gains in May were across all sectors. Construction payrolls increased by 25,000 jobs in May after rising by 21,000 jobs in April. Construction employment fell in March for the first time in eight months.
Manufacturers added another 18,000 jobs last month on top of the 25,000 created in April. Government payrolls increased by 5,000, reversing April's 3,000 drop.