Job Report Cools Fears of Pending Inflation
New employment statistics released Friday provide strong evidence that the much-feared threat of the national economy overheating and triggering inflation has receded.
The Labor Department reported that the U.S. jobless rate held steady at 4% last month as private-sector employers added 138,000 workers, a moderate gain suggesting that economic growth is slowing but still healthy. The government figures also signaled that workers’ pay increases are staying ahead of consumer price increases.
“We have a stable unemployment rate now of around 4%, we have good economic growth and low inflation. This is nirvana,” said Stan Shipley, an economist at Merrill Lynch & Co. in New York.
Some analysts said the latest news appears to vindicate the efforts by the Federal Reserve to ease the economy into a so-called soft landing characterized by slower, noninflationary growth. To that end, the Fed has pushed up short-term interest rates six times over the last 14 months to dampen business activity. Most economists now predict that Fed policymakers will vote to stand pat at their next meeting Aug. 22 and leave interest rates untouched, although some of the most inflation-wary analysts foresee further rate increases later.
Outbreaks of strong inflation are a major bugaboo for policymakers, largely because, for the last half a century, they consistently have been followed by recessions.
Now, however, “it looks like the Fed has things in line. This should buy a couple of years of continued growth,” said David A. Wyss, chief economist at Standard & Poor’s.
Inflation-minded Wall Street generally appeared pleased by the employment report. After a day of fluctuating prices, the Dow Jones industrial average rose 61.17 points to close at 10,767.75, and the Nasdaq composite index climbed 27.48 points to reach 3,787.36. The yield on two-year Treasury notes, which are very sensitive to Fed policy, fell to nearly an eight-month low.
Still, analysts such as Sung Won Sohn, the Minneapolis-based chief economist of Wells Fargo & Co., warned that the fight against inflation is far from over. He said employers are straining to find enough workers, a scenario that easily could lead to sharp wage gains and dangerous levels of inflation.
“The economy is clearly slowing. The issue is, is it slow enough? I still don’t think it is,” Sohn said.
Sohn’s reasoning is that employers continue to hire substantial numbers of extra workers at a time when unemployment already is near the 30-year low of 3.9%, where it stood in April. “A 4% jobless rate is a very tight labor market by any definition.”
The result, Sohn added, is that, even when businesses encounter slow spells, “employers are afraid to let workers go. That’s one of the reasons we’re seeing a jump in manufacturing employment. If you’re a machine shop, you’re not going to let your semiskilled workers go because you’re not going to get them back.”
Workers Finally Making Headway
Still other analysts express the concern that the Fed already has moved too aggressively and is denying ordinary workers a chance to extend the wage gains of recent years. Americans’ wage gains, after lagging behind consumer price increases for more than two decades, began to outpace inflation in the mid-1990s.
For now, employers appear to be paying higher wages to hold on to workers. Friday’s report showed that average hourly earnings rose six cents, or 0.4%, in July, to $13.76. Over the last 12 months, the gain has been 3.7%. That compares with a 2.4% rise in the “core” consumer price index and a 3.2% increase in the overall consumer price index--which includes volatile energy prices--during the same period.
July’s wage gains, up from increases of 0.3% in June and 0.1% in May, “are great news for Main Street,” said Diane Swonk, chief economist of Chicago-based Bank One Corp. and president of the National Assn. for Business Economics.
Yet while many economists say that the nation’s productivity has been rising enough to absorb recent wage increases without igniting inflation, Swonk said she wouldn’t be convinced of that unless future government reports confirm the trend of rising productivity.
Speaking for the Clinton administration, Labor Secretary Alexis M. Herman dismissed the notion that the wage increases would kindle inflation as well as the idea that the economy might slow too much. “Clearly, we’re seeing some signs of moderation, but overall, we continue to grow this economy,” she said in an interview from Chicago, where she was campaigning with Vice President Al Gore.
Taking government and private-sector employment into account, the report showed that the nation actually lost 108,000 jobs in July, the biggest setback of its kind in nine years. All of that decline, however, came from the departure of 290,000 temporary census workers from the federal payroll.
As a result, analysts mainly focused on the 138,000 added private-sector jobs. Although that was a bigger gain than expected, it was down from the monthly averages of 224,000 in 1998, followed by 202,000 last year and 175,000 over the first seven months of this year.
Job gains came from a broad cross-section of industries. One of the surprise increases was the 46,000 rise in manufacturing, the biggest such gain in nearly two years.
Unemployment has now been 4% two months in a row and has remained in a 3.9%-to-4.1% range over the last 10 months.
Jobless rates among Latinos remained at 5.6%, just above April’s record low of 5.4%. Unemployment among African Americans declined to 7.7% in July from 7.9% in June but still was up from April’s best low of 7.2%.
Another encouraging note for workers is that the number of people who hold part-time jobs but would prefer full-time employment fell to 3.1 million in July, the lowest level since 1974.
July’s employment figures follow a cluster of recent reports suggesting a softening in consumer spending and a slowing economy.
Analysts noted that even one of the most buoyant recent reports--last week’s news that the gross domestic product climbed 5.2% in the spring quarter--the results were inflated by increases in government spending and in inventory accumulation that were unlikely to be soon repeated.
L.A. Area Lags Behind Nation
Economists say the July employment report and other recent data suggest that this quarter’s U.S. economic growth will be below 4%.
While the slowing growth and reduced inflation fears may ease concerns in many parts of the country, those trends could be more worrisome in California. The state, particularly the Los Angeles area, was hit hard by the early 1990s recession and has continued to post higher unemployment rates than the national average.
The July jobless rates for California will not be released until next week, but in June the state’s unemployment level was 5.2%, up from 5.1% in May. Los Angeles County’s rate in June was 5.4%, down from 5.7% the month before.
