By John W. Schoen Senior producer
msnbc.com
updated 7/6/2007 11:58:02 AM ET 2007-07-06T15:58:02

The latest data showing strong job growth are good news for anyone looking for a job or angling for a raise. But with the Federal Reserve still keeping an eagle eye on inflation, the news makes it unlikely the rate-setters will lower their guard — or interest rates — anytime soon.

Major Market Indices

The latest official jobs data from the government confirmed that, after barely breaking even in the first quarter, the U.S. economy is rebounding convincingly; some 132,000 new jobs were added in June, according to the Labor Department. That kept the unemployment rate at a historically low 4.5 percent. Workers also posted gains in their paychecks last month.

Friday’s report also showed that that the economy added more jobs in April and May than the government previously thought. Revised figures Friday showed that payrolls grew by a strong 190,000 in May, up from the 157,000 reported last month. And in April the total job pool expanded by 122,000, better than the 80,000 previously reported.

Those numbers point to a recovery that’s coming on somewhat stronger than expected. The consensus of economists polled by Reuters was for a gain of 118,000 new jobs in June, with the unemployment rate holding steady at 4.5 percent.

While the overall numbers were strong, not all industries are growing at the same pace. The big gains came in education, health services, leisure and hospitality and government. Those gains more than made up for job cuts at factories, retailers and certain professional and business services. Despite the ongoing slump in the housing market, construction companies also expanded employment, according to the government data.

The government’s numbers were bolstered by a separate report Thursday from payroll processor ADP, which found a net gain of 150,000 new jobs in June from the 383,000 employers who write paychecks for some 23 million workers. (Unlike the government report, the ADP figures do not include jobs in the government sector, which is currently adding about 25,000 new jobs a month.)

“My sense is that the economy is accelerating from its weakest spot late last year, now that the drag from housing and auto production is diminishing,” said Joel Prakken, chairman of Macroeconomic Advisers, which partners with ADP in assembling and analyzing the monthly data.

There have been other recent signs of strength in the job market. On Thursday, a widely-watched report by the Institute of Supply Management — a professional group for managers who keep their companies supplied with goods and service — showed a strong pickup in employment in June.

“Both manufacturing and non-manufacturing surveys point to the economy picking up momentum as the second quarter drew to a close,” said Bear Stearns chief economist John Ryding in note to clients. “This is an encouraging sign for growth in the third quarter.”

Help-wanted ads are up 24 percent over this time last year, according to to a monthly report released Monday by The Conference Board.

"Tight labor markets in many areas of the country and in specific occupations and industries like IT and healthcare are forcing companies to advertise more aggressively than last year in order to find the employees they need,” said Gad Levanon, a Conference Board economist.

Layoffs, meanwhile, have been easing. Planned job cuts fell 22 percent in June from the month before, according to the outplacement firm Challenger Gray & Christmas. The pick-up is even helping hard-hit manufacturing industries.

“The auto industry seems to be stabilizing,” said  company CEO John Challenger. “Those cuts are down by about a half from what we were seeing last year, so the real brunt of the job cuts have passed. But it's still the second heaviest industry for the year.”

Other industries are also seeing some weakness. Though the construction industry picked up in May, homebuilders and financial services companies still face the headwind of the ongoing unwinding of the housing market and the collapse of many subprime lenders; home sales are still stalled and prices declining. Many in the housing industry expect the downturn to last until at least the end of this year.

But the overall job numbers point to an economy that, after limping through the start of the year, is convincingly back in business. The bounce comes after a sharp pickup in orders, as businesses restocked inventories that were heavily drawn down in the first quarter. That has some analysts wondering whether the pace of growth will slow through the rest of the year as those orders are filled. The bigger risk seems to be that job growth picks up even more steam from here.

“There's no real pressure on unemployment,” said Challenger. “I suppose if you're worried about inflation, it's not great news.”

The reason for the inflation worry is that with unemployment at historical lows, some employers may have hard time filling jobs, which spurs them to raise salaries. If employers with growing businesses find jobs hard to fill, they're also under pressure to hand out raises to keep good workers from leaving.

All if which is great for workers. But if wages start to rise too rapidly, the risk is that the higher cost of labor – along with the extra money in consumers pocketbooks - could add upward pressure to prices. The question many analysts are now asking: how low can the unemployment rate go before the tight labor market begins to spark inflation?

Economists talk about the “natural” rate of unemployment; a level low enough to keep wages growing and consumers spending, but not so low that a tight labor market raises labor costs and begins pushing prices higher. Most experts generally peg that “natural rate” at 5 percent; the last time the jobless rate rose above that level, in 2001, wages gains soon began declining. Shortly after the jobless rate fell back below 5 percent in 2005, wage growth picked up again.

But there’s a debate underway in economic circles about whether ongoing changes in the economy could bring that “natural rate” lower — without sparking inflation. A number of cross-currents are at work. After rapid gains in productivity of the American workforce during the 1990s, for example, a slowdown in those gains could raise labor cost pressure. On the other hand, globalization and the outsourcing of production to cheaper labor markets continue to cut labor costs for some employers.

The question is more than academic. Since the destructive runaway inflation of the 1970s, Fed policy makers have considered inflation to be Public Enemy Number One. Given a choice between cutting interest rates to stimulate the economy and raising them to fight inflation, the modern Fed has tended toward a clear bias against inflation. With energy and food prices already on the rise, tight labor markets have become one more inflation worry to keep Fed official up at night.

Just as the job market has become more global, so too has the fight against inflation. Over the past 12 months, the Fed has held fast to its “do-no-harm” policy of leaving short-term rates alone, based on its reading of the U.S. economic data. So far, the strategy seems to be working well. Though the latest data on U.S. employment have been strong, they don't appear to pose an immediate inflation threat.

Meanwhile, with the global economy booming, other central banks around the world, particularly in Europe, have been busy raising rates based on the inflation threat they see in their own countries.

Those countries’ rate moves are one reason that long-term rates — including the mortgage rates you pay in the U.S. — have moved higher in recent weeks, according to David Wyss, chief economist with Standard & Poor’s.

“Bond markets have become global,” he said. “And what's going on in Europe may have more impact on our bond yields than what the Fed does.”

Reuters contributed to this report.

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