World growth at risk as US employment stumbles

WASHINGTON/LONDON (Reuters): The world’s economic outlook darkened on Friday as reports showed U.S. employment growth slowing sharply, Chinese factory output barely growing and European manufacturing falling deeper into malaise.

In a shock that sent global equity markets into a dive, the U.S. economy added just 69,000 jobs in May, less than half what analysts expected and well below what is seen as needed to keep the jobless rate moving lower. Readings for the prior two months were also revised down, while the unemployment rate rose for the first time in almost a year, to 8.2 percent.

The Labor Department report dealt a blow to confidence in the U.S. economic recovery, which until recently had contrasted with Europe’s deteriorating economic situation and seemingly intractable political crisis over government budget deficits.

“The negative employment data caps the recent deterioration in global economic data. From China to Europe to the U.S., all the data have shown real slowing,” said John Kilduff, partner at Again Capital LLC in New York.

The jobs figures, which raised expectations for another possible round of monetary easing from the Federal Reserve, also carried an important political dimension.

If sustained, the weakness in employment could threaten President Barack Obama’s bid for reelection in November. His challenger Mitt Romney said the data was “devastating news” for American workers.

Worsening economic conditions were also being felt in major emerging countries such as Brazil and India, causing some economists to wonder just where growth is going to come from.

“The global economy downshifted sharply in May, and judging by these data, the U.S. followed suit,” said Michelle Girard, economist at RBS.

U.S. stocks fell sharply as the employment numbers compounded worries about upcoming elections in Greece and banking troubles in Spain, pushing the Dow Jones industrial average down over 2 percent on the day, and negative for the year. Treasury bond yields, in contrast, continued to hit record lows across the board as investors scurried for safety.

In Britain, manufacturing activity shrank at its fastest pace in three years last month as the global economic slowdown hit demand for its goods.

Markit’s Eurozone Manufacturing Purchasing Managers’ Index dropped to 45.1 in May from 45.9 in April, slightly above a preliminary reading but marking its lowest level since June 2009.

It has been below the 50 mark that divides growth from contraction for 10 months. Similarly, the output index fell to 44.6 from April’s 46.1, also the lowest since June 2009.

U.S. manufacturing proved a bit more resilient, with the Institute for Supply Management’s index falling modestly in May but still at a respectable level of 53.5. New orders also rose to their highest since April of 2011.

Earlier data from France and from Germany, Europe’s largest economy, showed their manufacturing sectors contracted at the fastest pace in nearly three years. It was only German strength that had prevented the euro zone falling into recession in the first quarter.

Italy’s factories contracted for the tenth straight month, while in Spain the PMI fell below that of Greece’s, and posted the lowest reading of all the countries surveyed.

The news in Britain, linked inexorably to the fortunes of the euro zone, was little better.

The UK economy is mired in its second recession in two years and its PMI plunged to 45.9 last month, its lowest reading since May 2009 and the second-steepest fall in the survey’s 20-year history. Analysts had expected a more modest dip to 49.8.

The euro zone’s economic deterioration prompted more than a third of economists polled by Reuters this week to say the European Central Bank will cut interest rates from their record 1.0 percent low before the end of the year to boost growth.