Job Creation, Wage Inflation Top Estimates in December
The U.S. economy closed out the 1990s with continued robust growth but hints of inflation lurked around the corner, according to the government’s first report on December economic activity.
The unemployment rate held at 4.1%, its lowest level in 30 years, the Labor Department said Friday. Before the data were adjusted for possible holiday distortions, the unemployment rate was even lower, just 4.06%.
In addition, the economy generated an additional 315,000 new jobs in December, substantially more than the 240,000 that private economists had forecast.
Most of the new jobs were in services, but the new data suggest that even manufacturing, which has recently been shedding 30,000 to 40,000 jobs per month, may be stabilizing. Only 1,000 manufacturing jobs disappeared in December, the Labor Department reported, and revisions for November show that about 8,000 manufacturing jobs were actually created that month.
If manufacturing employment has, in fact, bottomed out, that could signal the arrival of U.S. unemployment rates in the all-but-unheard-of 3% range, said David Orr, chief economist at First Union Corp., of Charlotte N.C.
“During the past 18 months, almost half a million manufacturing jobs have disappeared,” Orr said. “The overall job growth rate has been dragged down by those losses. If manufacturing [employment] picks up, then unemployment might go down even further.”
But there were suggestions that the tight labor market was having a greater inflationary effect on wages than has been the case in recent months. Average hourly earnings of nonsupervisory workers rose a more-than-expected 0.4% in December--good news for the workers, but the sort of evidence the Federal Reserve might use to justify an interest rate increase when its policy-making committee next meets on Feb. 1.
“There’s hardly a snowball’s chance that [Fed chairman] Alan Greenspan won’t raise rates,” Orr said.
December’s hourly wage gain, if sustained over a year, would mean a 12-month increase of about 5%, compared with November’s annualized rate of about 1%.
“That’s good for Main Street, and it’s still not waving a major red flag in front of Alan Greenspan,” said David M. Jones, chief economist at the New York bond house of Aubrey G. Lanston & Co. “But it does suggest that after a couple of months of very slow wage growth, we may be seeing signs of a very tight jobs market.”
Jones said bond traders were reading the jobs and wages data Friday as clear signs of looming inflation and a corresponding interest-rate increase. But stock market investors were less pessimistic, preferring to overlook the warnings of a rate hike and concentrate instead on the strong economic growth that the jobs data implied. The Dow Jones industrials rose 269.30, closing at a record 11,522.56.
“The [jobs] numbers certainly point to a very strong momentum going into this year, and that translates into strong earnings growth,” Jones said.
Away from Wall Street, there was little argument among economists Friday about whether the Federal Reserve will raise interest rates in the coming weeks and months--the only questions were when and by how much.
Sung Won Sohn, chief economist at Wells Fargo & Co., said the Fed might want to wait until after its Feb. 1 meeting, because February is also when Greenspan is required to appear before Congress and justify his monetary policies.
“If he raises interest rates now, he’ll take a lot of flak when he goes before Congress,” Sohn said.
Sohn added that the Fed might want to wait to see how factors connected to the millennial rollover are affecting the economy. Part of late 1999’s torrid growth was connected to the anticipated Y2K glitch, he said, as businesses spent millions trying to avoid possible computer malfunctions. Now that such spending has ended, he said, the economy may slow.
“But by what magnitude? That will be an uncertainty for some time,” he said. If the slowdown were significant, he said, the Fed might not want to cool things even further by raising interest rates.
Jones, by contrast, argues the Fed will act sooner to avoid raising interest rates during the presidential campaign and appearing partisan. He said he expects “as many as two or three” interest rate increases in the coming months, each of 0.25%. These increases would flow through into the consumer credit markets, he forecast, taking fixed-rate mortgages to about 8.25% or 8.5% by summer.
Greenspan is scheduled to speak to the New York Economics Club on Thursday, and many Fed-watchers hope he will use the occasion to lay out his rationale for an upcoming rate increase, thereby reducing some of the uncertainty and suspense.
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U.S. Unemployment
Percentage of U.S. work force not employed, seasonally adjusted:
December:
4.1%
Source: Labor Department
