U.S. jobless rate lowest in 30 years

Report, combined with others, likely to spark interest rise

Fed could move in 2 weeks

Record expansion of economy raises fears of new inflation

U.S. jobless rate hits 30-year low of 3.9 percent

May 06, 2000|By William Patalon III | William Patalon III,SUN STAFF

The U.S. unemployment rate dropped to a 30-year low of 3.9 percent in April, underscoring the strength of the record expansion and increasing the odds of a big boost in interest rates when the Federal Reserve meets in two weeks.

The nation's jobless rate for April declined two-tenths of a point, from the 4.1 percent reported in March, the Labor Department said yesterday.

Businesses continued to add workers at a frenetic pace, heightening a severe labor shortage, while wages rose even more than economists had expected.

The report -- against a backdrop of other recent reports that show upticks in inflation, continued robust growth and falling productivity -- could induce Fed policymakers to raise short-term interest rates by a half-percentage point at their May 16 meeting, economists said.

The central bank has raised rates five times since June 30, though by only a quarter-point each time, and officials might feel the recent reports call for more aggressive action, many economists predicted.

"This has to raise the Fed's anxiety level much higher now," said Scott Brown, chief economist for Raymond James & Associates in St. Petersburg, Fla.

Surprisingly, stocks rose in the face of yesterday's reported jobless-rate decline.

The Dow Jones industrial average jumped 165.37 points, or 1.6 percent, to finish the day at 10,577.86. The Nasdaq composite index climbed 96.58 points, or 2.6 percent, to close at 3,816.82.

Usually, repeated interest-rate increases are bad for stocks, and the prospect of a bigger-than-usual increase would typically push prices down.

However, some economists are hoping that a half-point increase would mark the end of the Fed's campaign to slow growth by tightening credit -- a belief that might have eased investor concerns.

Other economists say that stocks rose because investors are still counting on only a quarter-point bump -- betting that central bankers understand that a half-point increase could damage the very expansion they are trying to protect by keeping inflation at bay.

Under Fed Chairman Alan Greenspan, the central bank has stood vigilant against the reappearance of inflation, the increase in the general level of prices that crimps a consumer's standard of living.

However, even as it's raised interest rates, the Fed has taken care to telegraph its moves, making sure investors weren't surprised by anything it has done -- since a bad surprise could send stocks into a steep tailspin.

Having overseen the greatest economic expansion in U.S. history, Fed Chairman Greenspan isn't about to jeopardize an impressive record by sending panic through the financial markets with a disruptive, and maybe unnecessary, bold move," said Richard Yamarone, chief economist for Argus Research in New York City.

As economic expansions go, however, the unemployment report shows that the current one remains the greatest ever.

Businesses added 340,000 jobs during April, after a revised March gain of 458,000 -- up from the 416,000 that was originally reported. Average hourly earnings rose 0.4 percent in April. That was more than the 0.3 percent economists expected and followed a revised 0.3 percent increase in March.

"All in all, this report tells of an economy still straining at the seams," said Christopher Low, chief economist for First Tennessee Capital Markets in New York.

At 3.9 percent, April's unemployment rate was the lowest since January 1970.

The payroll gain was led by the service sector -- including the biggest jump in a dozen years at such retail establishments as grocery stores and restaurants.

Government hiring also rose last month, including job gains within schools and for the 2000 Census. Construction jobs fell, while factory employment rose for the first time in three months.

Labor demand has been extremely strong, at times hampering the expansion by making it hard for companies to find the workers they need to build their businesses. When they can find workers -- particularly those with special skills in finance or technology -- firms often have to pay big to land them. That boosts payroll costs, the biggest single expense for most businesses.

The worker shortage has been an inflation concern of the Fed's for a number of reasons.

For one thing, rising wages give workers more to spend, which boosts overall demand within the economy, resulting in shortages or in increased sticker prices for goods and services.

What's more, higher wages increase expenses for businesses, forcing companies to protect their profit margins by either cutting costs or raising productivity.

Productivity growth -- achieved with streamlined procedures or enhanced technology -- has been climbing over the past several years, which has allowed corporate profits to grow even as costs rise and prices to the end-user remain steady.

But a government report released Thursday said productivity growth slowed sharply in this year's first quarter, while labor costs rose more than expected.

If those trends continue, companies can either watch their profits slow, or boost prices, contributing to inflation. Neither is good for the economy.

Although these pressures have been building for some time, Brown, the Raymond James economist, said yesterday's unemployment numbers might be the final bit of evidence that persuades central bankers to bump up short-term rates by a half-point.

"This report has to give the Fed the willies," he said.

Bloomberg News contributed to this article.

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