Jobless rate leaps to 3-1/2 year high in May

By Glenn Somerville

WASHINGTON (Reuters) - The U.S. unemployment rate surged to 5.5 percent in May, its highest in more than 3-1/2 years, as the barely growing economy lost jobs for the fifth straight month.

The jump in the monthly jobless rate was the biggest in 22 years. Together with a whopping surge in oil prices and a flare-up in Mideast tensions, it renewed fears the U.S. economy was at growing risk of sliding into recession.

Stock prices took their biggest tumble since February 2007 as investors grew panicky at the possibility of further oil-price spikes and potential violence after an Israeli official said an attack on Iranian nuclear sites looked "unavoidable."

Economist Robert MacIntosh of Eaton Vance Management in Boston described the May US. jobless rate as a "shocker" but not enough to conclude growth was completely stalling.

"The actual payrolls number itself was consistent with what we have been seeing in terms of a slowdown but not quite a recession. But the employment rate gives you a much weaker economic outlook than the payrolls number," said MacIntosh.

The Labor Department on Friday said 49,000 jobs were shed by employers last month, on top of 28,000 in April -- for a total of 324,000 lost since the beginning of the year. May's unemployment rate was up from 5 percent in April and was the highest since October 2004.

At a swearing-in event for a new Housing and Urban Development secretary, President George W. Bush briefly referred to the disappointing jobs report but conceded only that it signaled slower growth.

"It's clearly a sign that there is consistently slow economic growth," Bush said.

The Dow Jones industrial average plunged 394.64 points, or 3.13 percent, to close at 12,209.81, while the high tech-laden Nasdaq composite index fell 2.96 percent to end at 2,474.56. Markets were beset by fears that a steady drain in jobs and surging oil prices could signal the country was sliding into 1970s-style stagflation, in which growth slows while prices keep climbing.

Oil prices climbed to a record above $139 a barrel and a Morgan Stanley report predicted U.S crude prices could top $150 by the July 4 national holiday -- a development that would hit consumers hard at the gasoline pump.

But U.S. Treasury debt prices shot up as investors bet the weak jobs report pushed back any chance that the Federal Reserve might raise interest rates before November's presidential election.

WHITE HOUSE UNEASE

It added to discomfort at the White House, where spokesman Scott Stanzel said the unemployment rate was "too high for our liking," though he noted it stemmed partly from more job-seekers and "not from a broad increase in lay-offs."

The number of people in the work force climbed by 577,000 in May, up sharply from an increase of 173,000 in April. There typically is a rise in the number of young people seeking temporary work when school is out, the department said.

Tig Gilliam, head of staffing company Adecco SA's U.S. operations, said more people appeared to be seeking work as high food and gasoline prices crimped their budgets.