Jobs, Wages Grow, Fueling Prospects of Fed Rate Hike
The U.S. economy added 310,000 more workers last month, the government said Friday, a greater-than-expected surge that pushed wages up at their fastest pace of the year and lifted the odds that an inflation-wary Federal Reserve will raise interest rates later this month.
While the new jobs and extra pay were boons for the workers who won them, they represented powerful new evidence that the economy simply was not slowing as the Fed had hoped. That means the Fed, which already raised rates by one-quarter of a percentage point June 30, will tap on the economic brakes again soon, analysts said.
Higher interest rates would not necessarily end the happy mix of high growth, low unemployment and practically no inflation that the nation has enjoyed for more than three years. But analysts say they probably would mean that the days of trouble-free sailing were coming to a close--and that claims that the country has entered a “new era” of unfettered growth will wane.
“If this economy is slowing, you have to look pretty hard to find it,” said Stuart G. Hoffman, chief economist of PNC Bank in Pittsburgh. “The Fed is seeing more job strength and more wage inflation than it likes.”
Even America’s perennially shrinking manufacturing sector added about 31,000 jobs in July, the sector’s first serious employment gain in almost a year and a half.
The additions helped keep the nation’s unemployment rate at 4.3%, just one tick above its 30-year low of 4.2%.
They also helped boost average hourly earnings 0.5% to $13.29. Over the last year, the wage measure, which covers about 85% of the U.S. work force and includes all but top-earning executives, managers and professionals, has climbed 3.8%, it said.
The overall job gain was more than half again as large as the consensus of analysts’ forecasts. The economy has added jobs at an average of 208,000 per month since January.
The new signs of the economy’s strength unsettled the nation’s financial markets. The Dow Jones industrial average bounced up and down before losing 79.79 points, or 0.7%, to close at 10,714.03. The Standard & Poor’s 500 index dropped 1%, and the Nasdaq composite index fell 0.7%. The price of the widely watched 30-year Treasury bond continued a three-week decline that has pushed its yield (or market interest rate) up to 6.18%.
In most cases, economic strength is good news, not bad, for the markets. But investors worry that with each additional signal of strength the Fed is more likely to clamp down on growth, which could hurt corporate profits and send stock prices tumbling.
In fact, say most analysts, investors have cause for concern. They say that the new job and wage numbers are the latest in a string of statistics that are breaking a tie within the Fed over whether to slow the economy or let it continue to rip.
“The new report makes it a slam dunk they’ll tighten” when the central bank’s policymaking body next meets Aug. 24, said David M. Jones, chief economist at Aubrey G. Lanston & Co. in New York.
That’s a considerable change from the Fed’s last meeting in late June, when the central bank nudged up the federal funds rate, the rate at which commercial banks make short-term loans to each other, from 4.75% to 5%. But in a move that largely undid the effects of the rate hike, it coupled the increase with the announcement that it was dropping its bias in favor of future rate hikes.
The decision was widely seen as an awkward compromise between warring camps within the Fed board: the inflation hawks led by Laurence H. Meyer, who wanted to raise rates to slow the economy; and a group including recently retired Fed Vice Chairwoman Alice Rivlin, which believed the economy could continue its inflation-free growth.
Virtually all the new economic statistics since the June meeting have bolstered the position of the hawks by showing wage gains picking up and inflation-dampening trends, such as productivity growth, slowing.
Most analysts now predict that the Fed will raise the federal funds rate another quarter of a point when it meets Aug. 24 and could couple the move either with an increase in the largely symbolic discount rate, the rate at which the Fed lends to banks, or with an announcement that it is reinstating its bias in favor of future hikes.
The big questions that will hang over the meeting will be how much the Fed will have to slow the economy to staunch the risk of inflation and how many rate increases that will take. On these, analysts are deeply divided.
“The Fed has a clear route to early, gentle nudging of interest rates,” said Roger M. Kubarych, managing director of Kaufman & Kubarych Advisors LLC in New York and a former senior Fed official. “It will have no great problem controlling inflationary expectations.”
“Controlling inflation is going to be a much trickier, more complicated exercise this time around,” countered Alicia H. Munnell, a Boston College economist and former member of President Clinton’s Council of Economic Advisors.
One benefit of the economy’s strong growth that is already showing signs of waning is the recent decline in unemployment among traditionally disadvantaged groups.
The jobless rate for blacks, which had fallen from double digits to a record low 7.3% by June, was back up to 8.8% last month. Labor Department officials, while cautioning against reading too much into a single month’s numbers, acknowledged that the increase was substantial.
The jobless rate for Latinos continued to fall, from 6.8% in June to 6.2% in July. The rate for teenagers fell from 13.5% to 12.7%.
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Steady Jobless Rate
A look at the unemployment rate for the last year (seasonally adjusted):
4.3% in July 1999
Source: Department of Labor
