Strong Jobs Data Signal Economy Is Gaining Steam.
Fed Is Wary of Inflation Despite Wage Restraint; A ‘Goldilocks’ Moment
by Brian Blackstone and Greg Ip
Thursday, July 5, 2007
WASHINGTON – The job market’s solid performance in June, along with recent signs of vigor in manufacturing and a buoyant stock market, suggest the U.S. economy is entering the second half with considerable steam despite nervousness on Wall Street about cracks in the credit markets and woes in housing.
Employers outside agriculture added 132,000 people to their payrolls in June, and tallies for the previous two months were revised upward, the Labor Department said Friday. Unemployment remained a low 4.5%
The report suggests the economy is healthy enough to further diminish the chances that the Federal Reserve will cut interest rates in the next few months, and investors Friday pared back those odds. At the same time, the report cast doubt on the possibility that the job market is so tight it is fueling inflationary wage gains.
In short, the U.S. Economy seems to be enjoying a Goldilocks moment – not too hot, not too cold – after a few quarters of subpar growth and a few flickers of uncomfortably high inflation that conjured images of the 1970’s.
Job growth averaged 145,000 in the first half of the year, slower than last year’s pace but faster than some Fed officials anticipated, given demographic changes that are slowing the growth of the labor force. Average growth in the wages of production and other non supervisory workers remained muted, suggesting the low unemployment rate still isn’t putting much pressure on labor costs.
The U.S. economy grew at an annual rate of just 0.7% in the first quarter, but forecasters expect the government to report at the end of July that gross domestic product grew at better than a 3% pace in the second quarter. Because of volatile swings in inventories, economists have averaged the first two quarters to get a clearer reading on the underlying health of the economy.
Brian Sack, an economist with the forecasting firm Macroeconomic Advisers, expects growth for the rest of this year to be close to the expected long-term trend of just under 3%, and said, “The employment situation is helping that outlook.”
Nigel Gault, economist at Global Insight, says second-quarter growth – which he expects was between 3% and 3.5% - likely overstates the economy’s strength, but he anticipates the rest of this year will be “closer to the second quarter” than to the first. He anticipates second-half growth will be about 2.5%
A Wall Street Journal survey of forecasters, released Monday, found that on average they see the economy growing at a 2.5% pace in the third quarter and 2.8% in the fourth, though many anticipate growth about 3% for the rest of the year.
Corporate executives are sounding similar notes. “The weakened industrial sector is currently limiting demand for transportation services,” FedExCorp.’s chief executive, Fred Smith, said in releasing the company’s earnings late last month, “but we expext the U.S. economy to begin to show modest year-over-year improvement in the late-summer-to-early-fall time frame.”
The Fed still sees the labor market as tight – and the low jobless rate has prompted it to warn that the “high level of resource utilization” could enable firms operating near full capacity and workers in a tight labor market to win higher prices and wages. But the central bank is less certain than it was six months ago that the unemployment rate presages that sort of threat.
Fed officials have expected the slowdown in growth to push up unemployment, creating slack in the economy that would keep wage and price gains from accelerating. The economy did slow, but unemployment didn’t rise 0 and the pace of wage inflation didn’t quicken, a suggestion that the jobless rate, though near a six-year low, isn’t indicative of a worker shortage.
Average hourly earnings of production and non-supervisory workers rose 0.3% in June from may, the labor Department said. Over the past year, these earnings were up 3.9% from a year earlier, in line with the rate of growth for the past year. (Consumer prices rose 2.7% for the 12 months ending in may. The June reading comes July 18).
The more comprehensive employment-cost index was up 3.5% in the first quarter from the previous year, close to the range for the past several years. Acceleration of broader measures of compensation in the first quarter may reflect the vagaries of employee stock options and one-time bonuses.
Janet Yellen, president of the Federal Reserve Bank of San Francisco, in a speech delivered Friday via video to the Risk Management Institute of Singapore before the release of the jobs data, noted the possibility that “labor markets may not actually be particularly tight.” She said it is possible that low unemployment amid slowing growth means the economy’s long-term trend rate had dropped, but she was open to “benign explanations” instead.
Such uncertainty means that the Fed, while still expecting unemployment to rise, may not need to see it rise as much to conclude that inflation risks are easing. Still, the Fed is likely to remain vigilant on inflation for now. Even if the job market isn’t as tight as the low unemployment rate implies, it remains “somewhat tight,” Ms. Yellen said, which presents a risk of inflation. The Fed is also wary that a recent dip in core inflation, which excludes food and energy, is temporary, and the indirect effects of rising import and commodity prices could yet nudge it up again.
With joblessness near six year lows and wages rising, albeit slowly, consumers have the wherewithal to keep spending despite continuing weakness in home prices, which decreases homeowners’ wealth; signs of a pullback by lenders; and rising energy prices. Consumer spending makes up about two-thirds of economic output; even modest growth of this component can offset sizable drags in other sectors.
In a sign that weakness in housing hasn’t rippled-yet- through the economy, construction payrolls advanced 12,000 last month. Construction-employment gains were concentrated in nonresidential building and contracting, which has remained resistant to the slow-down gripping the residential sector. Payrolls also rose in health care, education, leisure and government. Manufacturing firms cut 18,000 jobs, the 12th-straight decline. Employment in retail trade and professional and business services also posted losses.
Source: THE WALL STREET JOURNAL