Jobs Surge Buoys Clinton, Triggers Wall Street Alarm
The economy created jobs at a surprisingly fast rate in June, delighting President Clinton but alarming Wall Street, which reacted by torpedoing stock and bond prices Friday in anticipation of a possible Federal Reserve move to raise interest rates.
The Labor Department reported that 239,000 new workers were employed last month, reducing the national jobless rate to 5.3%, the lowest figure in six years. Average hourly wages showed their largest monthly increase in at least 31 years.
Even as Clinton led election-year cheers for the robust job growth, the Dow Jones industrial average fell 114.88 points to close at 5,588.14, as traders grew fearful of accelerating inflation. Bond prices also slumped, with the benchmark 30-year Treasury bond yield leaping to 7.19% from Wednesday’s close of 6.93%.
Economists said Federal Reserve Board Chairman Alan Greenspan is virtually certain to press for an increase in short-term interest rates--perhaps as early as next week, well in advance of the next regularly scheduled meeting on Aug. 20 of the Federal Open Market Committee, the Fed’s policymaking arm.
“I would expect the move to come before August,” said economist Michael H. Cosgrove, who operates a one-man economic consulting firm called “The Econoclast” in Dallas. He said he expects Greenspan to poll panel members next week by telephone and announce an immediate 0.25% hike in rates.
“I would expect initially a 25-basis point move on the federal funds rate, and another 25 points at the August meeting,” Cosgrove said.
The federal funds rate--currently 5.25%--is the interest the Fed charges member banks for overnight loans. It is the bluntest instrument the Fed has for influencing interest costs across the economy.
The Fed declined to act on rates at a meeting earlier this week, but said it was watching the economy closely for signs of renewed inflation. Minutes of its previous meeting several weeks ago, released Friday, showed that the Fed’s policymaking committee voted, 10-0, to keep rates steady.
“The information reviewed at this meeting suggests that on balance economic activity has grown moderately in recent months,” the Fed’s minutes said.
Martin Baily, a member of the President’s Council of Economic Advisers, said he was maintaining the White House’s customary reticence on matters relating to the Federal Reserve and its actions.
But he clearly signaled Clinton’s desire to avoid a new round of interest rate increases when he said, “At the moment, in these numbers, we don’t see a direct concern about inflation.”
But other economists cited the wage-growth figures as adding to concerns about creeping inflation. With the economy operating at what most analysts consider to be full employment, businesses have been forced to increase wages to attract skilled workers, they said.
The Labor Department reported that average earnings climbed by 9 cents to $11.82 an hour in June. The increase was the largest one-month jump in wages since the government began reporting the statistic 31 years ago.
Wages have risen 3.4% over the past 12 months, the White House said. Baily called rising wages “perfectly appropriate,” since workers have seen relatively flat incomes for several years.
“Given full employment, the current trend in employment growth is unsustainable without triggering significantly higher wages and interest rates,” said Sung Won Sohn, economist at Norwest Corp., a banking concern in Minneapolis. “The best news on inflation is behind us: Price gains are more likely to accelerate.”
But he and other analysts said the overall performance of the economy is favorable, and likely to remain so through the rest of the year. That would represent good news for Clinton, and could raise questions about Republican presidential candidate Bob Dole’s intention to propose some sort of tax cut as the centerpiece of his economic program. Tax reductions tend to stimulate economic activity, creating even more inflationary pressure.
David Wyss of the economic forecasting firm DRI-McGraw Hill in Lexington, Mass., said that while any president gets more credit or blame for the economy than is deserved, Clinton is to be applauded for restraint in managing the slowdown of 1995.
“If the economy had tanked last year, Clinton certainly would have gotten the blame,” said Wyss. “But at least he didn’t mess it up, and in Washington these days that counts as a major accomplishment.”
He predicted that unemployment would be stable through election day Nov. 5 and inflation would remain at about 3%--the approximate underlying rate for the first half of the year.
The message of Friday’s figures to Dole, according to Wyss: “It’s not the economy, stupid.” He said Dole should rethink plans to offer a tax cut because there is no need to stimulate the economy or consumer spending further.
“The economy is starting to look like the Energizer Bunny: It just keeps going and going. There’s no evidence it needs any encouragement,” Wyss said. “The only thing that scares me is consumer debt, which is over 20% of disposable income for the first time in history.”
Dole’s spokesman said the strong job growth masks deep economic anxiety among low-wage workers, as well as an increase in the number of people taking second jobs to make ends meet. Dole advisors are still urging him to propose a broad-based tax cut to help relieve the burden on working families and free up money for private investment.
Economist David Levy of the Jerome Levy Economics Institute in Chappaqua, N.Y., predicted flatly that “the inflation rate will be lower by the end of the year.” Levy called Friday’s wage-hike figure “idiosyncratic” and suggested it would be revised downward next month.
“It may be that wage hikes are occurring among lower-paid workers, but the figure does not reflect broader income trends in the economy,” Levy said.
The June employment figures show that virtually all of the job growth occurred in service industries. Nearly one-third of the new jobs--75,000 in all--were in retail stores, with roughly half of those in restaurants and bars.
Temporary-job placement agencies added 38,000 positions, while hotels, auto repair shops and engineering firms also boosted their payrolls. Construction employment grew by 23,000 jobs.
Manufacturing, however, lost 7,000 jobs, partly as a result of strikes at General Motors Corp. plants.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Economic Scorecard
Recent indicators, which show an improving economy but may also be inflationary, are likely to have an impact on November elections.
Americans’ wages have been on the increase . . .
AVERAGE HOURLY EARNINGS
June 1996: $11.82
. . . while unemployment has been steadily dropping.
UNEMPLOYMENT RATE
June 1996: 5.3%
****
But the economy’s strength can bring higher inflation . . .
CONSUMER PRICE INDEX
May 1996: 0.3%
. . . and that has pushed interest rates up.
30-YEAR T-BOND YIELD*
July 5, 1996**: 7.19%
****
POLITICAL CONSEQUENCES
President Clinton is riding high on good economic news, with higher wages, more jobs and a stable inflation rate. Democrats seized the opportunity to take the credit.
Inflation poses a threat. If the Federal Reserve Board decides wage figures are inflationary, it could raise interest rates to try to slow the economy. Such a move poses risks for Clinton, especially if unemployment creeps up again by election day in November.
* Benchmark yield used to set long-term rates, such as mortgages
** Month to date
Sources: Bureau of Labor Statistics, Bloomberg news service
