Economy hits the sweet spot

NEW YORK (CNNMoney.com) -- A rush of reports Friday showed the economy growing at what is widely seen by economists and investors as just the right pace.

The reports showed solid growth in the job market and surprising improvement in manufacturing. And despite some weak recent reports from retailers, consumer spending continued to grow, keeping that key driver of the economy in gear. Consumer spending fuels nearly three-quarters of the economy.

But there was enough softness in consumer prices, home sales and income growth to calm any concerns about inflation. That should keep the Federal Reserve on hold on interest rates for some time to come.

"If you're the Fed, the only danger right now is you might strain your arm patting yourself on the back," said David Wyss, chief economist for Standard & Poor's. "It's about as good as you can get."

The latest reports were a contrast to Thursday's government report showing the economy grew at the slowest pace in five years in the first quarter. Wyss said despite all the good news Friday, there are some clouds on the horizon, but they shouldn't cause any economic storms in the near term.

"We don't know what's going to happen with oil prices, and we're not through the housing mess yet," he said. "But it certainly suggests the second quarter will be a lot stronger than the first quarter."

Wall Street reacted positively, with stocks rising in midday trading, pushing the Dow industrials and the S&P 500 further into to record territory. Investors like steady but not explosive economic growth, which is good for corporate earnings but doesn't threaten a pickup in inflation.

The day's leading report was the Labor Department's job report, which showed employers added 157,000 jobs to payrolls in May, up from a revised 80,000 gain in April. Economists surveyed by Briefing.com had forecast 135,000 new jobs in May.

The unemployment rate stayed at 4.5 percent, in line with forecasts. While the number of those listed as unemployed crept up by 18,000, that was outpaced by the gain of those with jobs.

The report showed average hourly wages rose 6 cents, or 0.3 percent, to $17.30, also in line with forecasts. The average hourly wage is now up 3.9 percent from a year earlier, above the 2.6 percent gain in prices for the 12 months ending in April.

Most job growth was in the service sector. Education and health services payrolls grew by 54,000 while the leisure and hospitality industries added 46,000 workers. But retailers, who have seen some weak sales recently, trimmed 5,000 jobs during the month.

Manufacturing lost 19,000 jobs, while construction employment was unchanged, even in the face of the downturn in home building over the last year.

A separate government report showed personal income fell in April for the first time since August 2005. Economists had forecast a 0.3 percent rise. Spending by individuals was up by more than forecasts, though.

That report also showed that prices paid by consumers for goods other than food and energy rose less than expected, putting the so-called core PCE deflator up just 2.0 percent over the last year.

The core PCE deflator is believed to be one of the Fed's favored inflation readings, and central bank policymakers are believed to want to see it between 1 and 2 percent. The Friday report marks the first time in just over a year that the reading was in the Fed's comfort zone.

Separately, a survey by the University of Michigan showed consumer confidence came in above forecasts at the end of May despite record high gasoline prices and declining home values.

And a survey of manufacturing executives showed business conditions in that sector improved modestly in May, rather than the slight decline economists had forecast.

There was more bad news for the housing sector, however, the one area of economic weakness frequently cited as a concern by the Fed.

The National Association of Realtors reported that its pending home sales index fell 3.2 percent, rather than the modest gain that had been forecast. The measure of sales that have been agreed on but not yet completed is seen as a more forward-looking reading on the state of the battered real estate market.