For once, the signal from the household survey was consistent with the payroll survey; household employment rose 105,000, and the unemployment rate ticked up to 9.1%.

The loss of economic momentum probably reflects the cumulative impact of surging commodity costs, which have squeezed consumer spending power and raised business costs, leading employers to become more cautious in hiring. We expect GDP growth of just 2.0% in the second quarter, little different from 1.8% in the first.

In the payroll details, manufacturing lost 5,000 jobs, its first negative month since October 2010, consistent with the much less bullish growth picture presented by the May ISM survey. Durables added 8,000 jobs (concentrated in fabricated metals and machinery), but nondurables lost 13,000. Employment in motor vehicles and parts fell 3,000, likely reflecting the damage to production schedules from the Japanese natural disaster. Overall manufacturing production-worker hours edged up 0.1%, pointing to just a weak increase in manufacturing output for May.

Construction gained 2,000 jobs, more than all of them in heavy and civil engineering. Residential construction jobs rose 8,000, but nonresidential jobs declined 9,000.

There was a broad-based deceleration in private services employment growth to 80,000 this month, from 213,000 in April. There were job losses in the retail sector, which lost 9,000 jobs (after a surprising increase of 64,000 in April), and in leisure and hospitality, which lost 6,000. The much-hyped hiring surge at McDonalds had little obvious impact on food services and drinking places. These added 14,000 jobs, but that was half the increase in April. Health services continued to add jobs (up 17,000), although fewer than usual.

The strongest part of the services sector was professional and technical services, which added 40,000 jobs, including accounting (18,000) and computer system design (8,000).

The government sector shed 29,000 jobs, of which more than all (30,000) were in state and local government. State employment was down 2,000 and local government was down 28,000. This extends a familiar pattern; over the last 12 months, state government jobs are down 24,000 (0.5%), while local government jobs are down 267,000 (1.9%).

The private workweek was steady, at 34.4 hours (the April workweek was revised up from 34.3 to 34.4 hours). The flat workweek combined with the small increase in private employment to generate a 0.1% increase in hours worked during May. But since hours were up 0.5% in April, the trajectory suggests that hours worked rose around 3.5–4.0% in the second quarter, much faster than the 2.0% increase in the first quarter. Since GDP growth appears to be coming in much weaker than that (around 2%), the implication is that productivity is actually falling in the second quarter. Firms are finding it more and more difficult to squeeze more output from their existing workforces.

Average hourly earnings rose 0.3% over the month and 1.8% year-over-year—well short of headline inflation, and nothing to worry the Federal Reserve on the wage inflation front. Total payrolls rose 0.4%, pointing to a similar increase in wages and salaries for the month.

The unemployment rate rose from 9.0% to 9.1%. There was a 105,000 increase in household employment, but that was outweighed by a 272,000 increase in the labor force. We still expect the unemployment rate to edge down over the rest of 2011, but only to about 8.6% by year-end. The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—edged down from15.9% to 15.8%.

The weak employment report will naturally lead to concerns that this is more than a soft patch, perhaps the dreaded double-dip downturn. We still take the view that we are seeing a soft patch within an underlying modestly paced recovery. Fortunately, we are now seeing some relief on commodity prices; if this relief persists, we expect growth to improve in the second half of the year. The crumb of comfort in today's report is that the workweek held steady overall, and actually rose in manufacturing. In an economy tipping into recession, the workweek is normally one of the first indicators to head south.

For policymakers, the implications of today's report are clear. The Fed has no need to think of tightening any time soon, and should be reviewing the quantitative easing playbook to ensure that plans are ready for a third round of quantitative easing, if necessary. But we think that the hurdle required for a QE III is very high, in terms of how bad the economy would have to look before the Fed would do it. One month's sluggish employment report does not clear that hurdle.

For the federal government, the prime objective should be to avoid adding any self-inflicted wounds to the economy's existing problems. In an ideal world that would mean raising the debt ceiling now, thus removing the danger of shocking the economy with a huge drop in spending or with an actual or feared debt default, when the present ceiling becomes binding on August 2. In reality, the negotiations will probably go down to the wire, but the message from the economy is that it is too weak to withstand a heavy and immediate dose of fiscal austerity. Fiscal support for the economy is already unwinding as previous stimulus spending runs down. A plan to stabilize the ratio of public debt to GDP over the long term is badly needed; a sharp immediate fiscal contraction is not.