Jobless Rate Is Lowest Since '01
Saturday, November 4, 2006
Unemployment fell last month to the lowest level in more than five years, to 4.4 percent -- a drum-tight labor market that shows the economy remains fundamentally strong despite weak spots such as housing and manufacturing.
The Labor Department said employers added 92,000 jobs in October, a modest number. But the department revised earlier estimates to show more payroll growth in August and September, for an average of 156,000 new jobs in each of the past three months. That was enough to drive unemployment down from 4.6 percent in September.
Higher interest rates have slowed economic growth. However, much of the bad news has come from just two sectors: housing and automobile manufacturing. The unemployment report and other data suggest that the problems there haven't spilled over to the broader economy.
Considering that some workers lack the education and skills to be readily employable, economists regard any unemployment rate below 5 percent as striking. "We are beyond full employment," said Mark Zandi, chief economist at Moody's Economy.com Inc.
The job market is tightening so much, some worry that it will fan inflation, as employers bid up wages to attract workers. Yesterday's report showed strong wage growth. A report earlier this week showed that productivity growth, which is necessary if companies are to raise pay without boosting prices, is stalling.
Investors reacted negatively yesterday, fearing that profits will suffer as corporations are caught between higher labor costs and weak productivity gains. The Dow Jones industrial average, which climbed above 12,000 for the first time last month, lost 32.50 points yesterday to close at 11,986.04.
Builders, manufacturers and retailers cut thousands of jobs last month, but those losses were more than offset by hiring in education, health care, professional and business services, government and other sectors.
"Both housing and autos are laying off in a significant way," Zandi said. "The two soft spots in the economy are growing softer, but the problems in housing have not bled out into the rest of the job market, at least not yet."
The employment report, the last statistical snapshot of the economy before the midterm elections Tuesday, provided fresh ammunition for Republicans and Democrats heading into their final weekend of campaigning.
The report "just shows how strong and how resilient our economy is," Commerce Secretary Carlos M. Gutierrez said during a visit to Knoxville, Tenn. "President Bush's prosperity agenda has produced a growing economy that has benefited millions of American families."
But many economists also noted that job growth has slowed in each of the past three months, and they predicted that unemployment would climb next year as home-building and auto production remain sluggish.
Democrats highlighted such forecasts as they criticized Bush's handling of the economy. "Job growth was too modest to allay concerns about whether job opportunities will expand in coming months," Sen. Jack Reed of Rhode Island, the ranking Democrat on the congressional Joint Economic Committee, said in a written statement. "Staying the course on the president's policies has failed to deliver greater prosperity and economic security for most families, which is why America needs a new direction."
The prospect of stronger inflationary pressures demolished lingering hopes in the financial markets that the Federal Reserve might soon cut interest rates. Rather, the Labor Department report strengthened analysts' predictions that the Fed will hold rates steady for some time, or perhaps raise them.
The central bank left its benchmark interest rate unchanged last week at 5.25 percent, but policymakers indicated in a statement that they see a risk that the tight labor market might drive up inflation.
When unemployment falls below roughly 5 percent, workers have more leverage to bid up wages and other compensation. That can be inflationary if employers raise prices to cover rising labor costs. If competition keeps prices down, businesses often have to accept smaller profits. If productivity -- output per labor hour -- is rising, both wages and profits can rise without inflation taking off.
Unemployment fell as low as 3.8 percent in 2000, during the technology boom, but inflation remained low because of rapid productivity growth.
In contrast, the Commerce Department said Thursday that productivity did not grow in the third quarter, while labor costs rose. Meanwhile, economic growth slowed sharply to a weak 1.6 percent annual rate, down from 2.6 percent in the second quarter.
For workers, much of the news was good last month.
Average hourly earnings for most employees rose 0.4 percent in October, and were up 3.9 percent from October 2005. These are the wages of production and non-managerial workers, who account for 80 percent of the workforce.
The Labor Department hasn't calculated the inflation rate for October, but since fuel prices continued to fall last month, it is likely that wages rose faster than consumer prices.
Those figures help explain why consumer spending has grown solidly in recent months despite the economic slowdown and softening home prices. "If consumers don't have to worry about their paychecks, they won't worry about spending," said Bill Cheney, chief economist for John Hancock Financial Services Inc.
The unemployment rate fell three months in a row to a low point for the current economic expansion, and the benefits were shared broadly. Unemployment fell in October for women, teenagers, whites, blacks, Latinos and workers at all education levels.
"It's tough to find people," said Roy G. Krause, chief executive of Spherion Corp., a national recruiting and staffing company. Hiring has been particularly strong in the fields of information technology, accounting and finance, he said.
Krause said his firm sees many workers who are confident about finding a job, are demanding higher wages and are receiving multiple job offers. "Employers have to be very cautious about keeping and retaining talent," he said.