Jobless Hike Eases Fear of Inflation : Slight Rise to 5.5% Cuts Interest Rates, Brings Stock Rally

The nation’s unemployment rate rose to 5.5% in August for the second increase in as many months, the Labor Department said Friday, as the economy created only 219,000 new payroll jobs, well below the monthly average so far this year.

The report, although reflecting a notable drop in manufacturing jobs, was greeted enthusiastically by economists and the financial markets as an important sign that inflation can be kept in check.

Interest rates fell on the news and stocks rallied from a recent slump. The Dow Jones Industrial Average surged 52.28 points for the best one-day advance since May 31. (Details in Business)

“This is something financial markets really wanted to see,” said Bruce Steinberg of the Merrill Lynch investment firm in New York.

‘Bad News Being Good News’

Analyst Allen Sinai of The Boston Co. said: “This is a real case of bad news being good news. . . . “

Economists have feared that a continued decline in unemployment in the roaring economy would dangerously tighten the labor pool, forcing up wages and prices and prompting the Federal Reserve to jack up interest rates to curb inflation.

“The Fed has to be happy,” said David Levine of Sanford Bernstein & Co. in New York. “There’s no basis for easing yet, but there’s no basis for tightening, either.

The increase from July’s level of 5.4% was also expected to resound through the presidential campaign, in which the course of the economy has been a major issue.

“The report is a blow to hopes for prosperity in the nation’s heartland,” said Susan Estrich, campaign manager for Democratic nominee Michael S. Dukakis, who has hammered away at the theme that many Americans are not sharing in the economy’s boom. “The decline in manufacturing jobs confirms fears that the nation’s trade balance is worsening. The report is a blow to hopes of easing the squeeze on working Americans.”

Bush Responds to Criticism

Vice President George Bush, who has cited job growth as a leading achievement of Republican stewardship of the economy, countered that the increased joblessness was “statistically almost irrelevant.”

“You have to look at these things broad-gauge,” he said, noting that the work force was expanding.

The increase to 5.5% pushed the unemployment rate back up to the level it held in May. It is still well below the standard of the last 15 years and compares to the rate of 5.9% a year ago.

The figures reflect employment by civilians and members of the armed forces in the United States. By another measure, which excludes military employment, the jobless rate increased from 5.4% to 5.6%. In California, civilian unemployment was 5.6%, compared to 5.4% in July.

The greatest impact of the higher unemployment--an additional 226,000 jobless after seasonal adjustment--fell on adult men, among whom unemployment increased 0.4 percentage points to 4.9%. Unemployment among women fell by 0.3 points to 4.8%. Joblessness among whites rose slightly to 4.9%, rose 0.4 points for Latinos to 8.4% and was little changed for blacks at 11.3%

Financial markets had been jittery for nearly a month as a result of indications that the economy was apparently on the verge of overheating. Although unemployment increased in July from a 14-year low of 5.2% in June, there was a strong surge of new jobs, originally gauged at 281,000.

Discount Rate Increased

On Aug. 9, the Fed slammed on the brakes, raising the key discount rate by half a percentage point to 6.5% to ease inflationary pressures.

Now, with the new report, “job growth is slower, average hours worked were down and there was much more moderation in wages”--up barely 0.1% in August, compared to 0.4% in July, Steinberg said. “What this does is allow the Fed not to have to act.”

Sinai called the new slack in employment “a needed retrenchment in a tremendous economic growth spurt” and said it “should take pressure off the Fed to do any more tightening before the election.”

In attempting to temper the bad news in the report, economists noted that the decline of 5,000 payroll manufacturing jobs was mostly in textiles, a relatively low-paying industry. Jobs continued to grow in key export-oriented industries, such as electronics and electrical and other machinery. Among the service industries, retail sales jobs declined, whereas wholesale jobs--more likely to aid exports--increased.

Revisions in Payroll Jobs

The Labor Department on Friday also revised upward the huge surge in payroll jobs it had recorded in June. The revision was from the 532,000 reported a month ago to 568,000.

But Friday’s report contained an important downward revision as well. Payroll jobs in July, originally reported to have increased 285,000, are now said to have increased only 200,000--well below this year’s average monthly level.

The 219,000 new jobs in August--also below the year’s average monthly level--provided further evidence that the economy is not in immediate danger of an unhealthy boom.

A survey of business payrolls put average job gains for the previous three months at more than 325,000.

Still, “it’s too early to say that the economy has slowed to the 2.5%-2.75% growth range that the Fed wants,” said Michael Penzer of Bank of America, San Francisco, citing the last four years’ annual growth in the gross national product of 3.4%.

There was a consensus that Friday’s report showed good news on the important question of wage inflation. An earlier reported 0.5% increase in the payroll hourly wage index for July had led to predictions that wage inflation has returned with a vengeance.

Wage Figure Altered

But the Labor Department revised the July increase to 0.4% and reported a scant 0.1% increase for August.

“The best part of the report was the moderation in wage behavior,” Merrill Lynch’s Steinberg said. Levine said: “The Fed pays a lot of attention to that, and that’s going to make them feel better.”

Lawrence Chimerine, an economic analyst with the WEFA Group, Bala-Cynwyd, Pa., and a frequent pessimist in interpreting economic statistics, agreed that “clearly there is no evidence of a wage-price spiral. The inflation we are getting is limited primarily to commodity prices, imports and food. . . . This will delay further tightening by the Fed. They won’t reverse what they did, but they can now afford to take a wait-and-see attitude.”