Oct. Job Numbers Show Economy Still Has Steam

Americans aren't having any trouble finding work. That's good for spending and the economy but could pose inflation dangers.

By Jerome Idaszak, Associate Editor, The Kiplinger Letter

November 3, 2006

The October job numbers show that the economy has underlying strength, despite a noticeable drag from the housing downturn. October's addition of 92,000 jobs, with nearly all posted in professional services, wasn't a blockbuster performance. But the surprisingly low unemployment rate of 4.4%, combined with sharp upward revisions for job gains in August and September, paints an overall picture of a robust hiring market. This will help sustain consumer spending in the months ahead, more than offsetting the hit that American homeowners are taking from their reduced ability to tap their houses for cash.

The latest job report will also put Federal Reserve officials on edge. The lowest unemployment rate in five and a half years plus continued gains in hourly wages—up 3.9% in the 12 months through October—follow other statistics showing labor productivity gains at only modest levels and benefit costs on the rise. This raises several red flags on the inflation front, since labor is the biggest expense for most companies.

The Federal Reserve certainly doesn't want these tight labor market conditions to get any tighter, which could argue for more interest rate hikes soon. On the other hand, the central bank also wants to see how deep the housing slump will go and how much the economy will suffer as a result. The ho-hum 1.6% rate of economic growth in the third quarter illustrated just how deeply the pullback in housing construction is cutting into gross domestic product.

We see the Fed continuing to walk a tightrope between inflation and growth concerns, meaning that Fed officials will probably leave rates unchanged for at least the next several months. However, a continued decline in the jobless rate could force the Fed's hand, prompting another rate hike by late January.

Meanwhile, we look for a total increase of 1.7 million jobs this year and 1.4 million in 2007. The unemployment rate will probably average 5% next year as the increase in GDP slows some from this year.

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