The nation's economy managed tepid job growth in May, with employers creating 78,000 new jobs rather than the 175,000 that had been expected...

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CHICAGO — The nation’s economy managed tepid job growth in May, with employers creating 78,000 new jobs rather than the 175,000 that had been expected, the government reported yesterday.

The disappointing employment report — the worst monthly performance since August 2003 — unsettled investors and helped push the stock market lower.

Many economists cautioned against interpreting the soft May report from the Bureau of Labor Statistics as signaling the start of a slowdown in the U.S. job market, however, noting that job creation has been extremely erratic for the past several months.

Behind the recent month-to-month volatility, said CSFB economist Jay Feldman, the trend in job creation by employers is “solid, though not spectacular.”

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When the jobs report is put alongside other recent economic data, “You get sort of this mosaic that suggests the economy is doing pretty decently,” echoed Bill Cheney, chief economist for John Hancock Financial Services in Boston.

Indeed, using data compiled from a separate survey, the Labor Department also reported yesterday that the U.S. unemployment rate inched down last month, from 5.2 percent to 5.1 percent. That’s the lowest jobless level since September 2001.

Yesterday’s downbeat employment report showed the economy creating jobs last month at a rate that is appropriate to the early stages of an economic recovery — but unnaturally soft for the current economy, which has progressed to the middle of the upward cycle, said Wachovia economist John Silvia.

Because the nation’s economy is showing solid growth but is not reliably generating jobs, Silvia said, there may be structural issues involved.

The question, Silva said, may be, “Is this a one-month dip or is this a signal that employment gains are severely limited in a global labor market?”

The employment report routinely draws close scrutiny from a variety of interests.

Erratic labor market

Wall Street investors watch the figures for hints on where interest rates may be headed, for example, because they know Federal Reserve Chairman Alan Greenspan considers employment a crucial barometer of inflationary trends. And because the issue of U.S. jobs is so politically charged, politicians and special-interest groups put their own interpretation on the figures.

The discouraging May job-creation figure, which follows an extremely strong April report, confirms that the labor market is still growing in “fits and starts,” contended the liberal-oriented Economic Policy Institute. It “throws cold water on the hope that April’s report was the beginning of a new, accelerated growth pace.”

Treasury Secretary John Snow, in contrast, said the report “shows that the economy keeps moving in the right direction” and that the “underlying fundamentals of the economy are strong.”

Financial markets focused on the question of what yesterday’s jobs report might mean for the Fed’s interest-rate strategy.

Over the past year, the Fed has raised its target federal funds rate eight times, in modest quarter-point increments, to the current 3 percent.

But recently, as the economy has shown signs of slowing momentum, there has been speculation that the Fed may end its stairstep increases after another quarter-point or two.

The soft jobs report “all but seals the deal on a coming cessation in Fed tightening,” said Sherry Cooper, chief economist at BMO Nesbitt Burns in Toronto, The Associated Press reported.

But Kurt Karl, an economist at Swiss Reinsurance in New York, argued that the Fed is more likely to focus on the improvement in the unemployment rate, according to The Associated Press. With wages continuing to rise, he said, “The Fed has to continue to raise interest rates. This (report) isn’t weak enough to stop them.”