| BUSINESSWEEK ONLINE : JUNE 21, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
U.S.: The Labor Markets Are Sending Mixed Signals The economy may be slowing, but it's not clear by how much Because of its timeliness and broad coverage of economic and wage trends, the monthly employment report has long been the data darling of the financial markets. But Wall Street's beloved turned coy in May--and at one of the worst times. Investors wanted clear economic signals about the Federal Reserve's next move. Instead, they got ambivalence. Yes, the May job data indicated the economy is slowing in the second quarter. But the report did not answer the more crucial question: Slowing by how much? Data suggesting a significant slowdown included the surprisingly small 11,000 gain in May nonfarm payrolls, the narrowest hiring in four years, and a very small gain in total hours worked (chart). But a case for not much of a slowdown could be made from the strong upward revision in the April data and a longer workweek overall, led by factory overtime. Fed policymakers have expressed concerns about the imbalances growing in this superhot economy, especially those building in the labor markets. That's why they adopted a tightening bias at their May 18 meeting. The Fed will be happy only if the economy slows enough to head off the kind of cost and production pressures that typically lead to higher inflation. Of course, the Fed policymakers will look at all available data before they sit down around the huge oval table on June 29-30. Most important will be the June 16 release of the consumer price index. Remember, it was the surprise 0.7% jump in the April CPI that reignited inflation fears on Wall Street. In addition, some data outside of the job markets would seem to support the not-slow-enough idea. The jump in vehicle sales in May show that consumer spending remains exceptionally strong. And factory inventories are remarkably low, a sign of future production gains. Perhaps the most important news to come out of the jobs report was the continued slowdown in wage growth. Inflation--long a no-show in this expansion--has reemerged into the debate over monetary policy (page 38). But, any inflation fears based on wage pressures are more illusory than genuine. Wage gains over the past three months showed some muscle. First, the Labor Dept. said that because of computer errors, the original March and April nonfarm hourly pay numbers were too low. The correction added 2 cents per hour to pay. Then in May, wages edged up another 5 cents, to $13.19 per hour. But even with the upward revision, wages have increased just 3.6% over the past year. That's a lot slower than the 4.3% annual pace of May, 1998, despite a drop in the unemployment rate to a 29-year low of 4.2% (chart). Some of the recent acceleration has been concentrated in the manufacturing sector. Factory pay in May was up 2.7% from a year ago, compared with a low 1.6% yearly rate in December. But that pickup hardly reflects good times for factory workers. More likely, it is the result of the massive layoffs going on in manufacturing. Typically, less-senior, lower-paid workers are let go first. Their absence boosts the average wage. Wage growth in the economy as a whole is unlikely to reaccelerate if the demand for labor is waning. And that seemed to be the news from May's minuscule payroll rise. The 11,000 gain was the worse payroll number since the drop of 7,000 in blizzard-struck January, 1996. And only 49.4% of industries added workers, the lowest rate since May, 1995. The employment weakness was led by the loss of an additional 45,000 factory jobs. The layoffs were a bit of a surprise because the recent purchasing managers' report had suggested that manufacturers had stopped shedding workers, and that industrial production has picked up. The May drop brings the total number of factory jobs lost since March, 1998, to 453,000. Layoffs also occurred in construction, where 40,000 jobs were lost. But construction employment had increased smartly during the unusually warm winter, so some seasonally adjusted fallback in building jobs was expected. Further layoffs in the building trades seem unlikely because housing remains one of the strongest sectors in the economy. Service hiring also slowed in May. Total service employment rose just 103,000, the smallest gain in nearly two years. The slowdown was evident in all the major private sectors, and government payrolls fell by 7,000. The may numbers, however, do not tell the whole story about the second-quarter labor markets. April's job gain was revised from 234,000 to a huge 343,000. That means that so far in the second quarter, payrolls rose 177,000 per month. That's slower than the 209,000 advance in the first quarter, but the pace is consistent with an economy growing about 3%. In addition, the nonfarm workweek grew by six minutes, to 34.5 hours. Most of the increase reflected a six-minute gain in factory worktime. And factory overtime increased by a large 18 minutes, to 4.6 hours. That suggests that manufacturers are boosting production. However, despite the longer workweek in May, the total number of hours worked in the economy has hardly grown in the second quarter. The April and May average of aggregate hours worked is up at an annual rate of just 0.5% from the first quarter, when hours rose 2%. The increase in aggregate hours is usually a good indicator of how fast the economy is growing. But not this time. Consumer demand still seems on a roll this spring. Purchases of new cars and light trucks rose again in May, to an annual rate of 17.4 million (chart). That was the best May sales rate on record, and it means that second-quarter car sales are running well above their first-quarter average. Weekly retail reports also show consumers are spending with gusto this quarter. The economy will not slow down significantly unless consumers do. But if aggregate hours aren't saying much about economic activity, what is their slowdown signaling? Probably that productivity is growing at another rapid clip this quarter, after output per hour grew at a revised 3.5% annual rate in the first quarter. If so, then productivity gains are offsetting even the modest growth in nominal pay. That means unit labor costs may not be growing by much in the second quarter. And unit labor costs are the major determinant for businesses' pricing decisions. Low costs are hardly the trigger for inflation worries, and they will support better profit growth. So, taken by itself, the May employment report left unsettled the issue of whether or not a rate hike is justified. But the betting on Wall Street is that the Fed will take out a little anti-inflation insurance. If anything, the Fed just wants to be sure that it doesn't fall behind in the battle to keep inflation bottled up. BY JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS U.S.: The Labor Markets Are Sending Mixed Signals CHART: A Sign of Slower Growth? CHART: The Job Data Still Show a Puzzling Trend CHART: Another Strong Month for Vehicle Sales INTERACT E-Mail to Business Week Online | |||
