U.S. Jobs, wages surge

Strength of economy a comfort to workers, a worry to investors

Fed wary of inflation

Hot market for labor portends interest rate increase this month


WASHINGTON -- Employers hired new workers at a surprisingly robust pace last month and had to pay substantially more to find them, the government reported yesterday.

While good news in most respects, the report underscored the mounting pressures in the labor market and substantially increased the likelihood that the Federal Reserve would raise interest rates at its next meeting, on Aug. 24, as insurance against an inflationary spiral in wages and prices.

The unemployment rate in July remained steady at 4.3 percent, the Labor Department said. But employers added an estimated 310,000 non-farm jobs during the month, 50 percent more than analysts had anticipated, suggesting that economic growth rebounded early in the summer after tailing off during the spring.

Average hourly earnings in July rose by half of 1 percent, to $13.29 from $13.23, continuing a gradual acceleration of wage growth in recent months. Earnings in July grew 3.8 percent over the previous year, up from a 3.5 percent annual pace in May and a 3.7 percent annual rate in June.

"Labor is getting more expensive per hour, and we're still using a lot of it," said Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University.

On Wall Street, which is far more attuned to the dangers of resurgent inflation and higher interest rates than to the benefits of full employment and rising wages, stock and bond prices fell.

The Dow Jones industrial average dropped 79.79 points to close at 10,714.03. The price of the benchmark 30-year Treasury bond plummeted, sending its yield, which moves inversely with the price, to 6.17 percent late in the day from 6.04 percent.

With the economy years into an expansion that has kicked promptly back into high gear every time it has shown signs of flagging, the Labor Department report showed that job growth, adjusted for normal seasonal variations, was strong in almost all industries.

Of particular note was a jump of 31,000 in manufacturing employment, the first increase in that sector since General Motors workers returned from a strike last August, and the first not related to the strike since March 1998. Manufacturers had been hit especially hard last year by the fallout from the global financial crisis that began in mid-1997.

Alan Greenspan, the Federal Reserve chairman, said last month that the central bank was watching especially intently for any signs that the combination of low unemployment and strong job growth was generating wage increases that could ignite inflation.

Some economists said that yesterday's data provided more than enough ammunition for the Federal Reserve to raise its benchmark federal funds target rate by another quarter-point later this month, to 5.25 percent.

The central bank raised the rate by a quarter-point in June, noting the potential for wage growth in a tight labor market to outstrip the strong gains in productivity generated by big investments in computers and other technology.

Economists said that yesterday's numbers reinforced a trend in economic reports in the past few weeks, including signs of a slowing in the growth of productivity, or hourly output per worker, and a rise in the wage component of the employment cost index.

Based on trading in the futures markets, investors are all but certain that the Fed will raise rates this month. Futures contracts on federal funds for September yielded 5.23 percent yesterday.

Other analysts said the case for a rate increase was not airtight, although they conceded that if the Federal Reserve did not move this month it would probably do so at its meeting in October.

The Fed cut interest rates three times in quarter-point increments last fall when economies and financial markets around the world showed signs of seizing up. Many analysts expect the central bank to take back the remaining two of those cuts and perhaps tighten policy a bit more over the next six months.

Greenspan has made clear that he views an ever-tighter labor market as a clear threat to generate inflation and endanger the stability of the long expansion, which, if it continues, will surpass at the end of this year the record set in the 1960s. And while the unemployment rate has hovered at 4.2 percent to 4.3 percent since March, the pace of job creation has picked up in recent months.

The 310,000 new jobs created in July "followed a 273,000 gain in June and was well above the average monthly increase of 208,000 for the first half of 1999," said Katharine Abraham, the Labor Department's commissioner of labor statistics. "Manufacturing and construction employment increased over the month, and several service-producing industries posted sizable gains."

The rate of job growth over the past year is still relatively moderate at 2.3 percent, said David Orr, chief economist at First Union Bank.

Pub Date: 8/07/99

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