- The Washington Times - Saturday, June 4, 2005

Nonfarm payrolls increased by only 78,000 jobs in May. Arriving at about 100,000 jobs below projections, the disappointing May increase marked the smallest employment uptick since August 2003.

So far in 2005, the trend in payroll growth has reflected a saw-tooth pattern: January (124,000), February (300,000), March (122,000), April (274,000), May (78,000). Three substandard performances have bordered two strong months. The important question, therefore, is whether future payroll growth will mirror the substandard months or the robust ones.

Meanwhile, since June 2003, when the unemployment rate reached its cyclical peak of 6.3 percent, the jobless rate has steadily fallen, reaching 5.1 percent last month. That’s its lowest level since September 2001, two months before the last recession ended. Private nonfarm payroll employment peaked in December 2000, three months before the recession began. It has now been three and a half years since the recession ended in November 2001, but private payrolls still have not returned to their pre-recession peak level. An increase of nearly 1 million government workers since December 2000 accounts for the entire growth in nonfarm payrolls over that period.

There is no consensus among economists regarding how the economy will perform over the next several quarters. Steady-as-she-goes optimists point to the recent upward revision of the first quarter’s annualized growth rate for gross domestic product (GDP). That rate was raised from the initial estimate of 3.1 percent in April to 3.5 percent in May. Pessimists, including, arguably, the Federal Reserve, worry that unintended increases in inventories have been responsible for increasing GDP more than total demand warranted. The growth in so-called “final sales of domestic product,” which removes the effect of inventory build-ups, has significantly slowed in recent quarters, falling from 5 percent during last year’s third quarter to 3.4 percent during the fourth period to 2.7 percent during the first quarter of 2005. Indeed, the minutes of the Federal Reserve’s early May meeting noted that the “deceleration in final sales over the first quarter had been accompanied by a sizable accumulation of business inventories.” The Fed’s latest data also reveal that growth in industrial output has slowed from a 7.8 percent annual rate during the fourth quarter to a 1 percent annual rate during the first four months of 2005.

Since the Fed’s May meeting, the Labor Department reported that consumer prices increased by 0.5 percent in April. For the February-April period, consumer prices increased at an annual rate of more than 6 percent.

In order to gauge the economy’s underlying inflationary pressures, policymakers like to remove the volatile food and energy sectors from their calculations of pricing trends. However, it is worth noting that the two major inflationary periods since the end of World War II (1973-75 and 1979-81) were precipitated by huge increases in the price of energy. And while energy admittedly plays a relatively smaller role in today’s economy than it did earlier, inflation hawks are nonetheless prudent to be concerned with the fact that energy prices increased 17 percent last year and have been rising at a 32-percent annual rate in 2005. Moreover, because productivity in the nonfarm business sector has been decelerating and real hourly compensation has been rising, unit labor costs, which actually declined in 2003, have been increasing at a rapid clip during the past three quarters, including an eye-popping 7.7 percent annual rate during the fourth quarter.

Beyond the rising cost of energy, which continues to work its way through the economy, other head winds include the continuing subpar growth in Europe and Japan and the surprising strengthening of the dollar since the end of last year. At their May 3 meeting, Fed policy-makers, according to the minutes, “observed that incoming data over the intermeeting period hinted at possible upside risks for inflation and downside risks for economic growth.” It appears that little since then has happened to change those trends.

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