Falling Jobless Rate Boosts Wages but Fuels Concern on Prices and Profits
A strong job report Friday helped revive a troubling theme prominent during the economic boom of the late 1990s: What's good for workers may not necessarily be good for investors and monetary policymakers.
The U.S. Labor Department reported a solid gain in jobs in January along with significant upward revisions in employment for November and December. The unemployment rate fell to 4.7%, its lowest level in more than four years, while workers' average hourly earnings rose more than expected. Wage growth on an annual basis hit a nearly three-year high.
The percentage of unemployed people without work for at least six months -- what is considered to be long-term unemployment -- declined sharply.
The bottom line: The labor market is tightening, which means more bargaining power and stronger wage growth for workers. Their earnings have failed to keep up with inflation during a five-year economic recovery marked by rising energy costs and growing competition with low-wage countries such as China and India.
Sluggish wage gains, along with lackluster job creation during the early part of the rebound from the 2001 recession, are a primary reason many Americans have been skeptical about the economy's strength and dissatisfied with President Bush's economic policies.
But the prospect of better rank-and-file pay and lower joblessness spooked some investors Friday because it threatened to reignite inflation and limit corporate profit growth.
Investors fear that inflation pressures could force the Federal Reserve and its new chairman, Ben S. Bernanke, to boost interest rates more than hoped for. That, along with weakened profit growth, could halt what has been a promising 2006 stock market rally.
Some analysts Friday altered their forecasts of what the Fed will do, with the prospect of rate hikes in March and May now seen as more likely. Before Friday, many had thought the central bank would raise rates at its next policymaking meeting March 28, the first for Bernanke, but take a breather in May.
"Today's labor report could not have been more disheartening to those who thought the Fed had ended its monetary tightening," said Eugenio J. Aleman, senior economist at Wells Fargo & Co. in Minneapolis, who now predicts the Fed will raise its benchmark short-term rate to 5% in May, instead of stopping at 4.75% in March.
More Fed rate hikes could lead to higher mortgage rates, further cooling a once red-hot housing market, analysts said.
