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Solid employment report offers whiff of inflation

U.S. payrolls increased in May, marking their largest gain in five months, and worker pay expanded, indicating companies were optimistic about the future after a first-quarter slowdown.

Non-farm payrolls rose by 280,000 in May, besting forecasts of 225,000 jobs, while the jobless rate edged higher to 5.5 percent from 5.4 percent, the Labor Department said. The unemployment rate increased as more Americans entered the labor market.

"It was a blowout report," JJ Kinahan, chief strategist for TD Ameritrade, told CBS MoneyWatch. "We created more private-sector jobs, and for the first time we have a hint of inflation."

Average hourly earnings gained 0.3 percent last month from April, pushing the annual growth rate up to a two-year high of 2.3 percent.

"The 31,000 jobs added in retail and the 57,000 added in leisure and hospitality weren't necessarily the highest-paying jobs around, but those gains do suggest that May's retail sales figures, due out next Thursday, will show consumers finally shaking off their winter blues," Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a note.

The payroll gains come after a revised 221,000 April increase, with hourly earnings up from a year earlier by the most since August 2013.

The monthly figures revived thinking the Federal Reserve would hike its benchmark interest rate before the end of the year.

"It puts added pressure on the Fed. I don't know if it moves up the timetable, but there will be a lot more speculation that it will move it up to September," said Kinahan.

Ashworth agreed. "It definitely makes a rate cut by September probable. Only 24 hours later, the IMF's suggestion that the Fed should wait until 2016 looks very dated."

The International Monetary Fund on Thursday urged the central bank to hold off until the first part of 2016 to start raising short-term rates because the U.S. economy remained below par.

The economy went into reverse in the first three months of the year, with growth shrinking 0.7 percent. Economists attributed the plunge to harsh winter weather, a widening trade gap, slower consumer spending and sliding energy company revenue, as well as a seasonal distortion in the growth figures.

That sharp decline -- the first contraction in U.S. gross domestic product since the first quarter of 2014 -- was also visible in the labor market, with employers pulling back on hiring between January and March.

But the pace of job-creation bounced back in April, and data out this week showed the trade deficit narrowing significantly, affirming the view among many forecasters that the early-year weakness stemmed from temporary factors.

Economists expect the economy to pick up speed in the second half of the year, with most projecting annual growth of 2.5 percent to 3 percent. They believe that such growth, while modest, is sufficient to continue pushing down unemployment and put upward pressure on wages.

"The labor market continues to improve, with low layoffs and strong hiring," said Gus Faucher, senior economist with PNC Financial Services Group, in a note ahead of the latest employment report. "The tightening labor market will lead to stronger wage growth in 2015."

How fast worker earnings rise over the rest of the year is a key test for an economy that depends on consumer spending and where hourly wage growth remains lower than before the Great Recession. Wages and salaries rose 2.6 percent in the first quarter compared with the year-ago period, stronger than in previous quarters but still shy of the 3 percent to 4 percent typical in a more vigorous recovery.

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