Jump in Jobless Rate Spurs Rally in Nasdaq, Dow
Signaling the apparent beginning of a slower-paced economy, the U.S. unemployment rate rose to 4.1% last month, up from a 30-year low of 3.9% in April, the Labor Department reported Friday.
The surprisingly weak report, capping an array of recent economic surveys suggesting moderating growth, showed the private sector losing 116,000 jobs in May. That is the worst one-month decline since November 1991, yet the news sparked a furious rally on Wall Street.
Economists generally regarded Friday’s report as persuasive evidence that the Federal Reserve’s six interest rate increases over the last year have finally started cooling the longest U.S. expansion. As a result, many analysts said, the central bank may be finished, or almost finished, with boosting the price of borrowing.
Their reasoning is that the Fed may have achieved its goal of guiding the economy into a so-called soft landing: a pattern of moderate and sustainable growth that is unlikely to ignite severe inflation.
“The economy does appear to be shifting down, but it’s shifting down from gears we never knew we had,” said David A. Wyss, chief economist for Standard & Poor’s, expressing optimism that growth will continue. “It’s hard to see how this could turn into a recession.”
Wall Street interpreted the news similarly. A broad stock market rally, led by technology shares, lifted the Nasdaq composite index 6.4% for the day, or 230.88 points, to close at 3813.38. The Dow Jones industrial average rose 1.3% on Friday, or 142.56 points, to close at 10794.76.
Still, for Americans more concerned about their job than their investment portfolio, there wasn’t much encouraging news.
Overall, the national economy enjoyed a respectable employment gain of 231,000 in May, but that was mainly because of massive federal hiring of temporary workers to carry out this year’s census count.
Jobless rates for both Latinos and blacks--which had fallen in April to the lowest levels since the government began tracking those groups separately in the early 1970s--bounced back up in May.
Among Latinos, unemployment last month was 5.8%, up from 5.4% in April. For blacks, the May rate was 8%, up from 7.2% the month before and the highest level since January.
What’s more, average hourly earnings in May rose by just one penny, to $13.65. While a relief to employers and investors worried about price increases, that is a bad sign for workers who in recent years finally started winning pay increases that exceeded the pace of inflation.
Another key gauge of the labor market, the average workweek in manufacturing, fell by eight-tenths of an hour to 41.4 hours, bringing the measure to its lowest level since March 1996.
“The economy may be slowing much more rapidly than I would like, and we might be seeing a significant increase in the unemployment rate over the next six months,” said Dean Baker, an economist for the Center for Economic and Policy Research, a liberal think tank in Washington.
Most business and Wall Street economists, however, expressed confidence that the nation’s nine-year expansion will continue, though at a somewhat slower pace. “The economy isn’t falling off a cliff,” said Mickey D. Levy, chief economist for Bank of America.
Levy attributed Wall Street’s rally Friday partly to a perception among investors that the Fed’s string of interest-rate increases, which raise borrowing costs and cut profit margins for business, are near an end. Fed policymakers next meet June 27-28 to weigh a possible change in the current short-term interest rate of 6.5%.
Still, economists said the Fed, led by Chairman Alan Greenspan, is certain to carefully weigh the producer price and consumer price reports due out over the next two weeks before deciding on its interest rate policy.
They also pointed to the central bank’s aggressive posture in late 1994 and early 1995, when the Fed last contended with signs of increased inflation. Though Mexico had just plunged into an economic crisis that rippled through Latin America and threatened a key U.S. export market, the Fed continued to boost short-term rates until the threat of inflation was extinguished.
Political considerations--or, more specifically, a desire to stay outside the political arena--also could coax the Fed to nudge up rates this month. Many analysts say that the Fed would rather increase rates now than be forced to do so in August or beyond, when the presidential election campaign moves into high gear.
But some economists, including UCLA’s Lee Ohanian, say it would be a mistake for the Fed to lift rates again. One reason, Ohanian said, is mounting evidence that there is no direct link between low unemployment or rapid economic growth and higher inflation.
He said also that the Fed “learned the hard way” in the 1970s that it can’t fine-tune the economy. Since then, Ohanian said, the Fed has “had long-range goals, and they’ve had some success in achieving those goals, such as maintaining inflation at a low long-term level.”
Many economists said the weak employment numbers probably exaggerated the downturn in the job market last month. They also discounted a separate, less widely followed gauge indicating that the number of people with jobs fell by a record 991,000 in May. Through May of this year, private-sector job growth still averaged 182,000 a month, only modestly below the monthly average of 202,000 for all of 1999.
The 4.1% unemployment rate remains extremely low by historical standards and returns the estimated level of joblessness to where it stood in March.
Yet other signs of a slowdown abound. Friday’s reports followed a week of economic data showing declines in auto sales, new home purchases, construction spending and the Conference Board’s index of leading economic indicators, along with slower growth in consumer spending.
On the other hand, consumer confidence remained high in May, and the week’s stock market surge--after months of plunging prices--could make many Americans feel wealthier yet, said Sung Won Sohn, the Minneapolis-based chief economist of Wells Fargo & Co.
Sohn, unlike many other economists, isn’t convinced that the nation’s surging economic growth is over. “Consumers could go out again on a spending spree.
“I believe the stock market is the canary in the coal mine, giving us advance warnings of an economic slowdown. Now the canary is chirping and singing again, indicating, if anything, that growth will rebound.”
Echoing many other business economists, however, he said: “The boom is nice to have, but it eventually leads to bust, and a bust is no fun at all. What we want is a slower rate of increase for stock prices and economic growth that can be sustained over a long period.”
If the expansion keeps slowing, it will be of particular concern for California and the Los Angeles area, which was devastated by a severe recession in the early 1990s. The state’s jobless rate for May will not be reported until next week, but in April it remained well above the national level, at 4.8%. Los Angeles County’s jobless rate for April was yet higher, at 5.4%.
In addition, rural communities in Central California continue to post some of the highest levels of joblessness in the nation.
Many regional economists, however, express hope that California’s recovery may have more resilience than the nation’s. Among other reasons, they say that the state is benefiting from its growing exports to Asia and Mexico, where economic conditions have been improving.
The job declines in the private sector were spread over numerous industries. Retail employment fell by 67,000, after an unusually big increase of 176,000 in April.
Construction employment was down 29,000 in May, but it still has averaged 22,000 a month this year, about the same as last year. Manufacturing fell by 17,000 in May, after posting slight gains the two previous months.
One of the few categories to gain jobs, services, was up a scant 17,000, well below its monthly average of 103,000 this year.
Along with the job figures, the federal government also released a report showing factory orders falling 4.3% in April after climbing a revised 2.7% in March. The decline was larger than expected and, combined with May’s decline in manufacturing employment, suggests a dip in a crucial sector of the U.S. economy. The sharpest reduction came in electrical machinery orders.
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Bad News for Main Street . . .
Unemployment rate jumps:
. . . Is Good News for Wall Street
Nasdaq soars, finishing best week ever (5 biggest Nasdaq weeks):
Sources: Department of Labor, Bloomberg
