The Latest Labor Report Sparks A Sell Off
Friday, July 07, 2006JEFF YASTINE: Mixed news about employment sent stocks tumbling on Wall Street today. The Dow fell 134 points and the NASDAQ lost 25. The sell-off was triggered by the government`s June employment report, which indicated that although job growth remained sluggish last month, wages rose. That renewed concern about inflation as well as the impact on interest rates. Scott Gurvey reports.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Job creation was a little weaker in June than most forecasters had expected. But the gains were across the board with both the goods-producing and service-providing sectors showing increases. The slower pace of hiring was encouraging for those looking to see the economy move from a rapid rate of expansion to something considered more manageable. But there was concern over an $0.08 jump in average hourly wages. That is a five-year high for this key measure of wage inflation. Employers added 121,000 jobs to their non-farm payrolls in June, and the job creation number for May was revised upward. 325,000 jobs were added in the second quarter. The unemployment rate held steady at 4.6 percent.
NEAL SOSS, CHIEF ECONOMIST, CREDIT SUISSE: Labor markets are just tight enough so that employers have to keep their workers working a longer work week, have to pay higher wages, not to attract new workers, but to keep the ones they`ve got. And all that suggests that in a very normal, cyclical way, the growth of profit two and three and four times as fast as the economy lately is probably slowing down to be no faster than the growth of the economy overall.
GURVEY: For investors, that indicates a slowdown in the rate of earnings progression, a bearish sign. But it might also incline the Federal Reserve to pause its string of interest rate hikes, something the markets would love to see. There is no clear consensus forecast for the Fed`s next move.
JOHN RYDING, CHIEF US ECONOMIST, BEAR STEARNS: There`s two takeaways. Firstly, that economic growth may be slowing towards trend, which would tend to favor the Fed holding rates steady. On the other hand, labor market pressures from the unemployment rate and from the wage side putting upward pressure on inflation, so the Fed could look at the report and go either way.
GURVEY: The Fed has said it is closely watching the data and it will get a lot of data before it meets next on August 8, in particular second quarter GDP and the employment report for July. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
JEFF YASTINE: President Bush says the June employment report is good news, marking the nation`s 34th straight month of job growth. For more on the administration`s reaction to that report, Washington bureau chief Darren Gersh sat down with Al Hubbard, director of the National Economic Council. Darren began by asking Hubbard if Wall Street overreacted to the June job numbers.
ALLAN HUBBARD, DIRECTOR, NATIONAL ECONOMIC COUNCIL: I`m the last person that can tell you why the stock market goes up or down on any given day. What we worry about here in the White House is the economy, economic growth, jobs, wages, compensation, productivity growth and on, every one of those factors. This economy is doing very well and the president is very pleased. And he believes we`re very much on a sustainable path.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: If we look at the numbers, the Wall Street economists, some of them have said that you had kind of the worst of both worlds. You had what looks like a slowing economy, but you also have some wage inflation. Is that cause for concern?
HUBBARD: Actually, we delighted by the increase in wages. Wages were up by five tenths of a percent nominally in June. That is very good news. The American worker deserves higher wages. We`ve had great productivity growth since the president has been in office. Compensation always follows productivity growth, but it is a lagging indicator. It always catches up once the unemployment rate gets lower, like it is now, below 5 percent, 4.6 percent. We`re delighted to see wages start growing more rapidly. It won`t be inflationary and it is very much a positive for the American economy and the American people.
GERSH: Explain that, why won`t it be inflationary?
HUBBARD: Because you have productivity growth. Productivity growth since the president has been in office has been at 3.5 percent a year, which, by the way, is at a record level for this extended period of time. When you have that kind of productivity growth, that enables you to have compensation growth on a non-inflationary basis. So if productivity growth is growing at 3.5 percent, that means your compensation can grow at 3.5 percent and it is non-inflationary. The compensation has been lagging productivity growth, so now we`re at a catch-up phase.
GERSH: We also did see though that retail employment was off about 86,000 since March. Starbucks was saying that they are going to come in at the low end of analysts` expectations for earnings. Are we starting to see the consumer finally maybe throw in the towel?
HUBBARD: Oh, the consumer is still doing quite well out there. The consumer is important, as you well know and as your listeners know and the viewers. Consumers represent 70 percent of the economy. Consumer spending continues to be quite strong and the good news is the investment spending is very, very strong and certainly all the indicators are that businesses are going to continue to invest very aggressively and that will lead to sustained economic growth.
GERSH: Well, this is an election year and if the economy is so good, why are the polls showing that 60 percent of the American people right now don`t like the president`s handling of the economy?
HUBBARD: There are a number of reasons for that. And obviously that frustrates us because the economy is good. I don`t think anyone would doubt that, 4.6 percent unemployment, much lower than it was on average in the `70s, the `80s or `90s. But a lot of people are anxious out there. High gasoline prices certainly contribute to that significantly. Obviously, the Iraq war situation creates a lot of angst and those are two major factors that create this economic uncertainty. The good news is people, when they`re reporting to polls, indicate that they`re concerned, but their own individual behavior suggests that they`re very much comfortable with the economy and believe in the economy or otherwise they wouldn`t be spending the way they`re spending.
GERSH: Let me ask you about (ph) not necessarily related to today`s news, but the administration put a lot of effort into Social Security and didn`t get very far with its large reform package. Are you going to try again on Social Security? Will maybe we see a smaller package, smaller ideas for Social Security reform?
HUBBARD: The president and all of us have been very, very disappointed with the Democrats with respect to Social Security. It is a huge problem facing the country. The longer we wait, the more difficult it is going to be to solve it. The Democrats decided not to come to the table and not to try to solve it. This president will never give up on Social Security reform.
GERSH: Al Hubbard, director of the National Economic Council. Thank you for your time.
HUBBARD: Delighted to be here. Thanks for the kind invitation.
