Plenty of Jobs Out There

Businesses continue to hire at a healthy clip, buoying consumer spending and bolstering the economic outlook.

By Peter Goldstein, Senior Economics Editor, The Kiplinger Letter

July 6, 2007

The job market keeps humming along at a steady pace, reflecting companies' faith that the current economic expansion will continue for some time. The net addition of 132,000 jobs in June, plus an upward revision in the May figure to a robust 190,000, will give consumers the financial strength to weather ongoing drags from the housing slump and high prices for gasoline, food and other essential items.

The bullish job numbers follow other signs that businesses see blue skies ahead. Note the latest monthly surveys of purchasing managers in both manufacturing and services, which paint decidedly upbeat pictures about the outlook for orders.

The low unemployment rate of 4.5% in June, unchanged from May, will keep the Federal Reserve on inflation watch. Practically speaking, that means the central bank is likely to keep interest rates unchanged this year and may well hike them a bit next year.

Of course, much depends on the future of the ailing housing market. The Fed probably wouldn't dare raise rates until housing shows signs of stabilization. Otherwise, rate increases might spark a deeper housing slump and threaten the current economic expansion.

The Fed is also doubtless concerned about the fact that wage growth remains strong. The June employment numbers showed growth in average hourly earnings of 3.9% from a year earlier, up from a 3.8% pace in May. The central bank doesn't want to see that rate accelerating, and the Fed will keep interest rates level to try to reverse the trend.

Janet Yellen, president of the San Francisco Fed, noted in a recent speech that steady interest rates are the best prescription for economic well-being right now. The rate-setting Federal Open Market Committee, which last met June 27-28, stated clearly that the Fed's main concern is that inflation might not moderate as expected, given "the high level of resource utilization" -- Fedspeak for low unemployment and a lack of spare industrial capacity.

This year, look for a net gain of 1.5 million jobs and about the same next year. Given slow growth in the labor pool, this should be enough to hold the jobless rate below 5%. Employers will continue to have trouble finding enough workers, particularly for positions requiring special skills or advanced training.

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