| BUSINESSWEEK ONLINE : JULY 19, 1999 ISSUE | ||||||||
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| BUSINESS OUTLOOK
U.S.: Good News about Jobs Is Bad News to the Fed Wage gains could start outstripping productivity, reigniting inflation The Federal Reserve cannot come out and say it directly, but the main reason policymakers want to restrain economic growth is to loosen up the labor markets. To admit that would be political suicide. But the Fed knows that, with markets already so tight, job growth must slow if the economy is to avoid a surge in wages that could trigger a rise in inflation. That's why the employment report, one of the first peeks at monthly economic activity, is back in the spotlight as a bellwether of future Fed actions on interest rates. For the outlook, the June employment report signaled that business activity ended the second quarter on a solid note. Nonfarm payrolls grew by a stronger-than-expected 268,000. And the average workweek lengthened by six minutes, helped by another gain in factory overtime. That's a sign that manufacturing is rebounding. As for price pressures, the June report was a mixed bag. True, wage growth in the second quarter slowed further. And the trend in total hours worked in the economy suggests that productivity growth posted another stellar performance last quarter. But job gains, though shrinking a bit (chart), are still too large to keep the unemployment rate from falling further from its already low 4.3%. Moreover, workers seem less worried about being laid off than at any time in this eight-year expansion. Less job insecurity could lead to more demands for bigger pay raises. In addition, the Fed saw other hints of price pressures in the data released right before the long Fourth of July weekend. The nation's purchasers said that their price index jumped to the highest level in almost two years and that companies are taking longer to fill orders. Also, auto makers are predicting that 1999 again may set a record in sales. That's hardly a sign of slower consumer spending, another trend that policymakers would like to see. OF COURSE, THE FED recognizes that labor markets have tightened over the past few years without an accompanying pickup in inflation. As the Fed noted in the June 30 statement announcing its interest-rate hike: ''Labor markets have continued to tighten over recent quarters, but strengthening productivity growth has contained inflationary pressures.'' Productivity very likely posted another big increase in the second quarter. Total hours worked in the economy edged up at just a 0.7% annual rate in the spring, even as the available spending data indicate that the economy grew at a pace in excess of 3%. Unless foreign producers satisfied the majority of that demand (data on foreign trade are now available only through April), U.S. output per hour worked appears to have grown by 2% or more last quarter. That gain not only explains why inflation remains tame but also suggests that corporate profits performed well last quarter. The Fed's worry is that the U.S. is near the point where the labor markets become so tight that pay gains begin to outstrip even the recent strong productivity advances. Nonfarm hourly pay rose 3.6% in the year ended in the second quarter, down from 4.3% in the spring of 1998. But as long as businesses face a shrinking pool of available labor, wage acceleration remains a long-term threat to this expansion. Indeed, yearly wage growth in manufacturing, which had slowed to 1.8% at the end of last year, has accelerated to 2.9% as of June. As Fed Chairman Alan Greenspan has said, the laws of supply and demand in the labor markets have not been repealed. AND SO FAR, JOB GROWTH is not slowing enough to loosen up the labor markets. Thanks to a loss of 5,000 jobs in May, second-quarter employment growth averaged just 195,000 new jobs per month, the smallest quarterly rate in 3 1/2 years. Even the broader tally of employment, the household survey that includes the self-employed and farmers, shows new jobs increasing by about 180,000 per month over the past year. The problem is that the labor force is growing only by about 160,000 per month. Employment gains at the current pace will reduce the jobless rate to below 4% by yearend. Healthy employment gains appear to be contributing to a change in job attitudes among consumers. A large 45.8% of consumers viewed jobs as ''plentiful'' in June. And the so-called quit rate, the ratio of the unemployed who voluntarily left their last job, averaged 13.9% last quarter, the highest quarterly percentage in more than nine years (chart, page 37). Greenspan has pointed to the quit rate as a measure of job security. He believes that job anxiety has been a key reason holding down wage growth in this expansion, as workers who are worried about layoffs are unlikely to seek bigger pay raises. But if workers feel confident that they will have no problem finding a new job, they are more likely to leave their current employer, possibly for another job at higher pay. FACTORY WORKERS are the one group still holding on to their job jitters. Manufacturing cut 35,000 more jobs in June. Almost half a million factory workers have been laid off since March, 1998. But the news from the industrial sector is getting better. The National Association of Purchasing Management reported that its business activity index rose from 55.2% in May to 57% in June, the highest reading in two years. The NAPM said that production, orders including exports, and inventories all increased in June. In particular, the NAPM's employment index has jumped in recent months, suggesting that the factory job losses may be ending soon. In addition, the purchasers' index covering prices paid for supplies jumped to 53.5%, the highest since October, 1997. They also said that delivery times are lengthening (chart). That's a sign market activity is beginning to press against the distribution system, usually an early signal that heavy demand is causing production constraints that can lead to price increases. One hot spot for demand is vehicle sales. Purchases of cars and trucks hit an annual rate of 16.9 million in June. The second-quarter average stood at a 16.7 million pace, up from 16.4 million in the first quarter, marking the strongest quarter since 1986. To keep the economy from overheating, the Fed would like to curtail demand for autos and a host of other goods and services. When businesses see demand ebbing, they will rethink their hiring plans. Job growth will cool and so will pay demands. To achieve that end, the Fed faces a delicate operation. It wants job growth to slow, but only enough to keep price pressures from working their way into the system. Once rising inflation takes hold, the Fed knows it would have to tighten policy more severely. Slower job growth may be politically incorrect, but the alternative--a recession--would be a policy disaster. BY JAMES C. COOPER & KATHLEEN MADIGAN _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS U.S.: Good News about Jobs Is Bad News to the Fed CHART: Job Growth: Slower, but Still Strong CHART: Take This Job and Shove It CHART: Purchasers See More Industrial Activity INTERACT E-Mail to Business Week Online | |||
