- The Washington Times - Friday, May 5, 2006

Signs that economic growth is moderating even as wage growth hit a five-year high cheered Wall Street yesterday and sent the Dow Jones Industrial Average to a six-year high and within 150 points of its record.

The Labor Department reported an increase of 138,000 jobs last month, led by a rare spurt of 19,000 new manufacturing hires, and more solid gains in construction, finance, health care, professional and technical work.

But the number of new jobs created in the previous two months was revised down by 36,000, and retailers pared their work forces, apparently in anticipation of more subdued consumer spending.

Wage growth surged by 0.5 percent, for a 3.8 percent gain in the last year — the largest since August 2001. But with unemployment steadying out at 4.7 percent, the picture of moderating growth soothed financial markets, which have worried that more robust growth like the first quarter’s 4.8 percent pace would spark inflation and prompt the Federal Reserve to keep raising interest rates.

The Dow soared by 139 points to its third-highest close, 11,578, a level not seen since January 2000. The Standard & Poor’s 500 index, another blue-chip stock gauge, climbed to its highest level in five years at 1,326. But the technology-led Nasdaq Composite Index, which skyrocketed during the Internet bubble, remains at less than half its previous high.

The stock market’s gains this year have come on signs that the economy is maturing into a stage of expansion in which workers start to partake more in the profits corporations are enjoying even as growth settles down to a steady trot.

“The low unemployment rate of 4.7 percent suggests we have very strong labor demand, and strong labor demand usually is followed by wage increases,” said Edward P. Lazear, newly appointed chairman of the White House Council of Economic Advisers.

Less of the earnings from improved output or productivity by workers will be devoted to profits in the future and more to wages, he said. “We are moving into the phase where we expect that wage growth will catch up and take over productivity growth.”

Roger M. Kubarych, an economist with HVB Group, said, “The economy comes into the second quarter with reasonably good growth, but with a tendency toward deceleration” that will reassure Fed officials that it is not overheating. Most analysts expect the Fed to raise rates another quarter-point notch Wednesday, but then pause for a while to see if growth and inflation continue to moderate.

While the growth in average hourly wages has picked up this year, that is primarily a result of a shift toward higher-paying jobs in manufacturing and salaried professions from low-paying hourly jobs like those in retail, analysts said.

Workers are earning higher wages because they are exhibiting flexibility and mobility, and stepping up into higher-paying jobs, Mr. Kubarych said — not a trend that should disturb the Fed.

Despite an inflation scare on Wall Street that at times has spooked the stock market and sent market interest rates to four-year highs, wage growth is subdued and will remain so because of long-term trends holding down inflation pressures in the job market, he said.

Workers today are more likely to see merit pay raises, bonuses and other compensation tied to their performance than the kind of automatic cost-of-living increases that generated wage pressures and higher inflation in previous eras, he said.

Also, American wages have been restrained by competition from a global work force of more than 2 billion, from China to Mexico and Brazil. The bargaining power of labor unions is waning, to the point that union wages now often lag nonunionized workers’ pay.

Employers also have been successful in recent years at curbing the surging costs of health care benefits, often by pushing some of the increasing costs onto workers through higher co-payments and deductibles.

While that has enabled employers to raise cash wages, it means workers are paying far more for health care. And that, with record-high energy costs, is absorbing much of the pay increase.

With high costs for fuel and other essentials neutralizing recent pay raises, and the housing market in a downturn, many economists expect consumer spending to slow significantly this year, leading the way for lower economic growth.

Michael Alter, president of SurePayroll, a payroll-services firm, says small businesses generally anticipate slower times ahead and have refrained from hiring in the last three months. At the same time, they are granting hefty pay raises to their existing employees — often after providing little or no increase in pay for several years.

“Much of the increase in salary can be attributed to catch-up. Indeed, salaries have only now recovered to levels that we saw in July 2004 — almost two years ago,” he said.

Peter Morici, business professor at the University of Maryland, said recent job and wage growth has been uneven, mostly benefiting workers with high skills and education who are at the top of the income scale.

“The job market continues to display a disturbing dichotomy — a booming market for the top quartile and a mediocre to lousy market for everyone else,” he said. “It’s caviar for the best and cake for the rest.”



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