From NYT, July 8, 2006
Jobs Data Indicates Economy Is Slowing
By
EDUARDO PORTEREmployers added only 121,000 jobs in June, the government reported yesterday, indicating that the economy was slowing under the combined weight of high energy prices and rising interest rates.
But the government also reported that hourly wages rose at their fastest pace in five years, while the unemployment rate remained at 4.6 percent. This suggests that the labor market remains tight and may yet spur higher inflation.
The disparate data underscored the uncertain economic situation facing the Federal Reserve as it ponders whether to continue raising interest rates over the summer to cool the economy further or whether it is time to pause. Over the last two years, the Fed has steadily increased the benchmark federal funds rate from 1 percent to 5.25 percent.
"Today's numbers only tighten the vise the Fed finds itself in," said Carl Tannenbaum, chief economist of LaSalle Bank in Chicago. "The challenge is not to be overly restrictive as growth slows and still attentive to inflation risk."
Financial markets' reaction to the news was mixed, underscoring the difficulty in parsing an uncertain situation that seems poised between a cooling and an overheating economy.
Most Wall Street economists had been expecting considerably higher payroll growth. So, the price of Treasury bonds rose and the dollar fell against major currencies as the weaker job growth supported the view held by some investors that a slowing economy would allow the Fed to pause in its monetary tightening. (But, a falling dollar will press the Fed to raise interest rates to protect US global borrowing status).
Noting that the data suggested both that demand would slow and that the forces pushing inflation could intensify, Mr. Tannenbaum said, "There's a fine line between stagflation and a soft landing." With consumer prices rising at an uncomfortable rate of around 4 percent, the Fed and its chairman,
Ben S. Bernanke, have been expecting the economy to slow from the torrid pace of 5.6 percent growth recorded in the first quarter. A slowdown would help damp the inflationary pressures that have been strengthened by rising energy prices.
The weak payroll growth recorded in June by employers surveyed by the Labor Department appears consistent with this view, pointing to a cooling economy, weighed down by a slower housing market and moderating consumer borrowing and spending.
Added to lackluster job growth in April and May, the weak hiring pattern in June brought the pace of job creation to about 108,000 a month in the second quarter, down from 176,000 in the first three months of the year.
Employment in the construction sector remained essentially flat — declining by 7,000 jobs as a contraction in residential building was offset by growth in construction of factories and other nonresidential structures. Employment fell at temporary-help agencies while the retail sector shed jobs for the third consecutive month.
The three months of very modest employment growth, and momentum that doesn't look like it is building would suggest, some economists argued, that the Fed's string of 17 interest rate increases since 2004 is starting to do its job. The Fed could thus leave interest rates at 5.25 percent at its next meeting in August, rather than raise them by another quarter of a percentage point. Still, some economists noted that other indicators pointed to tightness in the labor market. In particular, hourly wages grew by 3.9 percent compared with June 2005, the fastest pace in five years. Moreover, the index of weekly hours worked, the broadest measure of labor use in the economy, increased by 0.4 percent in June. However, it may be that low unemployment has left fewer people to hire, so instead employers are paying their existing workers more and are working their work force for longer hours."
To be sure, since the economy emerged from recession in 2001, wages have been merely trying to catch up with inflation, not spurring it. Consumer prices rose by 4.1 percent in the 12 months to May — dwarfing wage gains. Though the inflation figure for June is not yet known, it could well overshadow the 3.9 percent annual gain in hourly wages last month. Moreover, labor productivity has been growing rapidly, keeping a lid on the rise in employers' spending on labor. Wages should have already accelerated more than they already have in light of the strong economy and the low unemployment rate and the way headline inflation has constrained real wages," said Mickey D. Levy, chief economist at Banc of America Securities.
Still, several analysts observed that the overall employment data does not support an optimistic view of inflation prospects, and do not let the Fed off the hook. With unemployment at its lowest since July 2001, wage pressures could build up more.
"I expect the Fed will continue to go," said Richard Yamarone, chief economist at Argus Research. "The only part that supports a pause by the Fed is the headline payroll number. But on balance, the strength is still seen in the numbers."
Other indicators also suggest that the labor market remains tighter than the payroll numbers might suggest. Some 387,000 jobs were created in June, according to the survey of households, released by the Labor Department in tandem with the employer survey used to calculate payroll growth.
While the employer survey is considered a more reliable indicator of the strength of the labor market, the household survey is thought by some economists to better capture jobs created by small and newly formed companies.
And other unofficial indicators pointed to relatively strong hiring. This week,
Automatic Data Processing said that its payroll data suggested that employment increased by 368,000 in June. The index of the online job search firm Monster.com — a leading indicator of job growth, based on help-wanted postings — recorded a solid increase in June, driven by demand for white-collar workers. Some skilled occupations, like accounting, auditing, information technology, health care and transportation, appeared to be facing worker shortages.
"Our employer customers continue to report concerns over turnover, particularly in occupations with acute skill shortages," said Steve Pogorzelski, president of
Monster Worldwide. He added that the index showed growth in 18 of the 23 occupational categories used by the government and declined in only 2: personal care and services, and farming forestry and fishing.
