Job Growth Steps Up

Companies continue to hire at a healthy pace, showing faith in the economy's long-term health.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

Peter Goldstein, Senior Economics Editor, The Kiplinger Letter

June 1, 2007

This economy still has legs. The May job figures testify to that. The net addition of 157,000 jobs is more evidence that the economy's first-quarter slump was a temporary event. The employment numbers also highlight businesses' growing confidence that this economic expansion is far from over -- even if growth is likely to be moderate for some time.

Note that the service sector, which accounts for 80% of the job market, added a robust 176,000 positions in May, reflecting underlying strength in hiring. Manufacturing continues to shed workers, but the pace of decline seems to have stabilized, as companies try to become more competitive in the global market for goods. Construction employment, which held flat last month, will probably continue along that line as the downturn in home building is offset by a healthier commercial property market.

The health care sector will continue to play a prominent role in service job growth, thanks to the growing health care needs of aging baby boomers. Of the 685,000 net jobs created this year, about one-fourth have been in health care. Architectural and engineering services also continue to add jobs, helped in large part by commercial construction.

The solid employment news was buttressed by two other reports today. A closely watched monthly survey of purchasing managers in manufacturing showed they are increasingly bullish about business conditions. Managers said that production increased for the fourth straight month in May, while new orders rose for the sixth straight month. Also, a report on consumer spending during April shows an increase despite rising prices of gasoline and sliding home prices.

These signs point to businesses restocking inventory in the coming months after a drop in the first quarter subtracted a percentage point from gross domestic product (GDP). Look for a nice pickup in growth this quarter after GDP expanded an anemic 0.6% in the first quarter.

That said, the economy certainly isn't about to shift into overdrive. Monthly job growth so far this year is averaging 133,000, compared with 189,000 in 2006. Even with tepid growth, however, we look for the economy to add about 1.5 million net new jobs this year. While that amount is much less than the 2.26 million net last year, it will be enough to sustain modest economic growth.

The downside of the job report is its implications for inflation and the future course of interest rate policy at the Federal Reserve. By any measure, the labor market remains tight: May unemployment held steady at a low 4.5%, while average hourly earnings were up a still-speedy 3.8% over the 12 months through May, accelerating from 3.7% in April.

The Fed is doubtless worried that the low level of unemployment will continue to stoke inflation pressures, arguing against a decrease in interest rates anytime soon, despite mild economic growth. It now seems more likely that the Fed will hold the benchmark federal funds rate steady for the rest of this year, at the current 5.25%.

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