Jobs, income gains bright spots in 2006

The job market was the brightest spot in the economy at the end of last year, with wage gains hitting a six-year high of 4.2 percent and employers creating another 167,000 jobs, the Labor Department reported yesterday.

In all, 1.8 million new jobs opened up in 2006 while the healthy growth in incomes enabled consumers to overcome high gas prices and keep spending despite deep troubles in the housing market and the auto industry. The unemployment rate, at 4.5 percent in December, was at the lowest levels since 2000.

By the end of the year, robust growth in services, management and professional jobs like health care, education, engineering and telecommunications overwhelmed job losses in construction and manufacturing that resulted from the weak real estate and auto sectors. Many economists expected the opposite, thinking housing-related job losses would cascade into broader weakness in the labor market.

“It’s certainly going to go a long way in calming fears that a housing slowdown was taking the economy apart,” said Jim Paulsen, chief investment officer for Wells Capital Management. He expects forecasters to increase their estimates of economic growth this year as a result of the surprisingly strong job growth.

Other recent reports, including news of a weak Christmas sales season, have suggested economic growth and consumer spending are softening.

“Clearly, there is support for consumer spending” from the solid job and income gains, and that will underpin growth in the broader economy, said John Silvia, chief economist at Wachovia Securities.

Stocks and bonds fell on yesterday’s news, as it played into worries at the Federal Reserve that an increasingly tight job market, especially for skilled and educated workers, will stoke wage growth and bolster inflation. Wages constitute about two-thirds of the costs covered by consumer prices.

Fed watchers said that rather than cut interest rates this spring, as many in the markets hoped, the jobs report will prompt the central bank to keep rates elevated and maintain vigilance against inflation.

“Wage gains remain a two-edged sword,” said Mr. Silvia. They are “good for personal income” and economic growth, but they underpin inflationary pressures.

“The Fed isn’t going to do anything this quarter” to change its anti-inflation stance, said Jack Malvey, global fixed-income strategist at Lehman Brothers Holdings Inc. “The momentum of the U.S. economy is more vigorous than some in the market presume.”

Roger M. Kubarych, economist at Unicredit Markets, said the markets need to awaken to this fact: The Fed will not consider cutting rates unless the job market starts to show weakness.

Peter Morici, business professor at the University of Maryland, said employment conditions may not be as good as they seem. The department reported that 6.8 million people remain unemployed, and participation in the labor force remains well below 2000 levels because another 1.3 million would like to work but are discouraged and have stopped looking for jobs. Many would-be workers have dropped out to seek schooling.

Also, the department’s survey of households shows that more than a million people became self-employed last year, often because they could not find good payroll jobs, Mr. Morici said.

“Many people who have been displaced from positions with regular employers have sought refuge in home-based consulting and blue-collar pickup jobs,” he said. “For many these days, self-employment is three parts resume posting and one part work, but it still counts as employment at the Labor Department.”

Lawrence Kudlow, president of Kudlow & Co., said the growth in self-employment and one-man businesses is a hallmark of an entrepreneurial economy.

Story Continues →