Meager Aug. jobs gains favor Fed holding steady

September 02, 2006|By Jim P. Miller | Jim P. Miller,Chicago Tribune

U.S. employers created 128,000 net new jobs in August, the Labor Department said yesterday, providing new evidence that the labor market has managed to remain relatively healthy despite the economy's slowing momentum.

Since April, job growth has cooled to a tepid average of 119,000 per month from a substantially stronger 206,000 average during the preceding five months.

As in recent months, August's job gains once again "came in at a less than stellar but more than disappointing level," observed Joel L. Naroff, of Naroff Economic Advisors.

The reason for the easing pace is clear: "The U.S. economy is slowing, holding job growth to a modest pace," said Michael Gregory, an economist at BMO Nesbitt Burns.

While roughly in line with economist forecasts, the benign jobs data - along with a separate report that indicated expansion in the manufacturing sector - suggested to many observers that the Federal Reserve's effort to cool the economy is playing out successfully.

"The economy is behaving in a very desirable way at present," said L. Douglas Lee of the consulting firm Economics from Washington.

Although there's been concern of late that the rapid falloff now occurring in the once white-hot housing sector could drag down the broad economy, Lee and other experts said, neither of yesterday's two major reports provide any evidence that is happening.

"Overall growth in the industrial sector remains solid," said JPMorgan economist ??, adding that, to date, manufacturers are "seemingly insulated from the housing adjustment."

To cool inflationary pressures, the Fed has raised short-term interest rates by 4.25 percent over the past 26 months.

But tapping the economic brakes through rate increases is more art than science, especially deciding when to let up.

Because it can take as long as a year for a rate increase to fully work its chilling effect on the economy, Fed officials are often described as seeking to drive the nation's economic policy while looking in the rear-view mirror.

The Fed passed up an opportunity to raise rates for an 18th consecutive meeting in August, however. There is always a danger of raising rates so high that the economy doesn't just slow down, but stalls. Such a Fed overshoot is known as a "hard landing."

Yesterday's closely scrutinized economic reports offered little to suggest that such an unwanted event is currently in the cards.

The nation's unemployment rate, which is based on a different survey than the one used to measure job creation, declined to 4.7 percent from the previous month's 4.8 percent reading, according to the Labor Department.

Many observers think unemployment, which is low by historical standards, will begin to creep up slightly late this year or early next year.

Workers' average hourly earnings inched up 0.1 percent from July, to $16.79 in August. During the 12-month period that ended in August, though, hourly wages grew by a much larger 3.9 percent.

This month's smallish pay increase, combined with similarly slight decline in the average hours worked, will likely hold down inflation, but doesn't do much fatten workers' wallets.

The number of jobs currently being created roughly matches the 100,000-plus the economy needs to create every month to accommodate population growth.

The moderate pace, if it stays in place, "should be enough to sustain a healthy expansion of consumer spending," said Nomura economist David H. Resler.

Jim Miller writes for the Chicago Tribune.

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