U.S. Joblessness Drops to 5.7%, Lowest Since ’79

The nation’s unemployment rate dropped to 5.7% in December, its lowest rate since July, 1979, the Labor Department said Friday, as the rapid creation of new jobs provided further indications of broad-based economic vitality.

The department’s survey of business payrolls showed an increase of 325,000 jobs for the month, a figure twice as high as analysts had expected, bringing the number of new jobs created in 1987 to 3 million.

Economists hailed the figures as “tremendous news” for the economy, calling the report evidence that fears of a decline in spending and production after the October stock market crash had been overwrought. “The biggest bears out there have to be rethinking their forecast,” said Kathleen Cooper, chief economist at Security Pacific National Bank in Los Angeles.

But the markets plunged after the announcement, with the Dow Jones industrial average plummeting 140.58 points. Investors apparently were concerned that the low unemployment rate would spark fears of inflation and give the Federal Reserve Board leeway to tighten interest rates and thereby constrict economic growth.

The markets read the report as a renewed threat of tighter policy by the Federal Reserve, a sure recipe for weak financial markets and eventual recession, said David Wyss of Data Resources Inc. in Lexington, Mass.

“This is the paradox,” said Allen Sinai, chief economist at Boston Co. and chairman of Economic Advisers Inc. “The good news of getting closer to full employment is very bad news for interest rates, so the good news is not good news for the stock market.”

Skittish Markets

However, economists disagreed about whether fears of higher interest rates were exaggerated. Wyss and Sinai agreed that the markets “have every right to be worried,” but others dismissed Friday’s stock decline as a premature reaction of skittish markets.

“Certainly, if the economic numbers, including unemployment, continue strong for another month or two, the Fed might indeed be worried that wage inflation might take off,” said Michael Penzer, vice president and senior economist at Bank of America in San Francisco. “But I don’t think that this is quite the time yet for them to raise interest rates.”

With the decline in the unemployment rate, down 0.1 percentage point to 5.7% in December, the number of people listed by the government as jobless dropped 112,000, to 6,978,000, the first time it has been below 7 million during the Reagan Administration.

The report indicated a continued willingness of employers to create jobs and hire workers, particularly in goods-producing industries.

A ‘Vibrant Economy’

The figures were “more evidence of a fundamentally sound and vibrant economy,” Labor Secretary Ann Dore McLaughlin said. “We should continue to focus our energies on ensuring new opportunity for workers and employers so that more good news will follow throughout the year.”

Strong employment growth throughout the year was the highlight of labor market developments in 1987, Janet L. Norwood, commissioner of labor statistics, told Congress’ Joint Economic Committee. The 3-million job increase for the year helped to reduce the rate of unemployment by a full percentage point.

Another measure of unemployment, which excludes the military, put the December rate at 5.8%. The overall jobless rate in California declined slightly in December, from 5.3% to 5.2%. Massachusetts, with a rate of 2.9%, again had the lowest unemployment rate in the nation.

400,000 Factory Jobs

Nationwide, the department found an increase of 55,000 jobs in construction and 40,000 in manufacturing, continuing a trend that has boosted factory payrolls by more than 400,000 jobs since last December. Much of that increase in manufacturing has come in export-related industries, Norwood said.

Developments in services industries were mixed, with increases in health, business and wholesale industries but no expansion in retail-trade employment. General merchandise stores showed a seasonally adjusted drop of 35,000 workers from October to December.

The expansion in production sectors and stagnation in sales suggests “a lot of inventory accumulation in the fourth quarter,” Sinai said. “The big question will be whether sales in the first quarter (of 1988) will support the big production side increase in the fourth quarter (of 1987).”