Economy produces 339,000 more jobs Expected slowdown blows past February

March 08, 1997|By Jay Hancock | Jay Hancock,SUN STAFF

The remarkable U.S. economy kept chugging in February, adding the most jobs since May, leaving fewer people unemployed and adding to the suspense over future interest rates.

The country had 339,000 more jobs last month than it did in January, after adjustments for seasonal rhythms, the Labor Department said yesterday.

That's about 100,000 more than many analysts expected, and it suggests that the current economic expansion will blow past its sixth birthday this spring and aim toward a seventh.

"It says the economy is stronger than we all expected and will continue to show strength through the first half of the year," said Robert Sweet, chief economist for Allied Investment Advisors in Baltimore.

Many experts had been predicting an economic slowdown -- if not late last year, then now. It's not happening.

Unemployment fell to 5.3 percent last month from 5.4 percent in January. Jobs in management services, computers, engineering and other services increased by 230,000, their best result in four months.

Average hourly wages for production workers rose only 3 cents in February, to $12.09, after increases of 2 cents in January and a nickel in December. That suggests that labor costs aren't stimulating higher inflation.

"Almost all this stuff is wholly against what was expected," said James Annable, chief economist for First Chicago NBD. "There's still good economic growth, and not a lot of evidence of pressing wage inflation in the wage data."

That's a puzzle for watchers of the Federal Reserve, the country's central bank.

In the teeth of strong growth, plus obvious inflation pressure, the Fed wouldn't hesitate to boost short-term interest rates to try to slow the economy and head off increases in prices. (Higher prices typically result from robust expansion.)

On the other hand, weak growth and weak inflation would make the Federal Reserve stimulate the economy by cutting rates, or at least bide its time.

But the equivocal February results hewed to a happy, unforeseen and by now well-chiseled pattern for this economy: moderately strong growth, low inflation.

As usual, the bond market didn't know what to make of it.

Bonds quickly plunged yesterday after the report's release. But then they recovered, and the yield on the Treasury's main 30-year bond dropped to 6.81 percent from 6.88 percent. The Dow Jones Industrial Average ended the day up 56.19, at 7000.89.

Mild weather exaggerated February's employment gain, said Katharine G. Abraham, the commissioner of the Labor Statistics Bureau. Construction jobs, chilled during January, grew by 109,000 last month, with its unseasonable warmth.

Not sustainable

"Clearly that's not a sustainable pace," said David Berson, chief economist for the Federal National Mortgage Association (Fannie Mae) in Washington. Total job growth for the month of 339,000 "overstates the underlying strength of the job market," he said.

But even "core" employment expansion of, say, 250,000 jobs last month "is still pretty strong," Berson said. "I think the Fed views this warily, because of its implications for underlying economic growth."

Yesterday's figures show that the economy is still expanding at well over a 3 percent annual rate, Berson said. The country's gross domestic product grew by a 3.9 percent annual rate in the fourth quarter and by 2.4 percent for all of last year.

Many economists believe that yesterday's report will make the Fed's Open Market Committee more likely to cool the economy by raising short-term interest rates when it meets March 25. Others think the committee might wait until it its May meeting or later.

But for some analysts, speculation about a Fed tightening this year is starting to veer from "if" to "when." It wasn't casually that Federal Reserve Chairman Alan Greenspan talked in recent congressional testimony about making a "pre-emptive strike" against in inflation, Sweet said. "I'm getting closer to feeling that they're going to make a move."

Much could depend on the next Labor Department reports on consumer and producer prices, due next Friday and March 19.

No matter what they show, though, yesterday's report "has to give [the Fed] additional concerns," Berson said. "I still would not expect them to tighten at the March meeting. But if growth stays above pace, I think there's a reasonable chance that the Fed could tighten in May."

Natural slowdown

Annable, the First Chicago economist, still holds hope for a natural economic slowdown -- without help from Greenspan.

"I'm convinced that the fundamentals are still making a strong case that this growth will slow, and will slow on its own," he said. "This really looks like an inventory-building quarter that we're going through here."

In other words, factories, distributors and stores are now working to refill empty shelves with goods.

But Annable expects that consumers will slow their spending and that the goods will stay on the shelves.

Even Annable, however, is less complacent than he was two days ago.

The oft-predicted slowdown still hasn't arrived, he said, and Fed Reserve policy-makers may be running out of patience.

"For the second quarter in a row, the Fed's [economics] staff has been promising them a slowdown and has been wrong," Annable said. "The fact is, it's not slowing down nearly as much as advertised, and that's making them jumpy."

Pub Date: 3/08/97

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