- The Washington Times - Friday, August 4, 2006

The job market weakened last month, with the unemployment rate rising from 4.6 percent to 4.8 percent, in the clearest sign yet that the Federal Reserve has engineered a major slowdown in the economy by imposing a sharply higher interest burden on consumers and businesses.

Most analysts now expect the Fed to refrain from raising interest rates at a meeting on Tuesday in what would be its first hiatus in two years. Market interest rates declined dramatically yesterday, reflecting the reduced chance that the Fed will take action.

The Labor Department reported yesterday that job growth slipped to 113,000 last month from 124,000 in June, suggesting the economy further decelerated this summer from an already modest pace of growth in the spring. The weakening was seen in most sectors, with no growth in retail and government jobs and manufacturing posting a loss of 15,000 positions.

“The Fed’s job is done,” said Bernard Baumohl, executive director of the Economic Outlook Group. “The economic expansion is noticeably winding down. … This is the appropriate moment to wait and see if past rates hikes are still working on navigating the economy toward a soft landing, and whether inflation is starting to turn back.”

The jobs report is “the single most important report card on what is going on” in the economy, he said. “We have now seen a consistent pattern all year where employers are scaling down hiring. With the labor markets this soft and as evidence mounts that other key economic sectors, like housing and autos, are weakening, the odds are we are approaching a cyclical peak in inflation pressures as well.”

Mr. Baumohl noted that the Fed has already greatly increased the interest burden for consumers with non-mortgage loans and credit card balances from an annual rate of $184 billion when it started raising rates in June 2004 to $231 billion last June. Interest costs on adjustable-rate mortgages also are going sharply higher for millions of homeowners, potentially adding hundreds of dollars a month to household bills.

The 26 percent jump in credit costs in the last two years has far outpaced the 12 percent growth in wages, putting consumers in a financial squeeze that will force them to hold down spending and keep growth subdued in the months ahead, Mr. Baumohl said.

Zoltan Pozsar, analyst with Economy.com, said the softening in job growth will “tip the balance in favor of a pause” at the Fed, even though central bankers will be concerned about signs that inflation is picking up at the same time.

Labor costs constitute about two-thirds of operating costs at most businesses. Yesterday’s jobs report showed that wage gains stayed near five-year highs with a healthy increase of 0.4 percent in average hourly earnings last month. A report on labor costs coming out on the day the Fed meets could show an even more worrisome increase, Mr. Pozsar said.

Hamilton College professor and former Federal Reserve economist Ann Owen said the decision will be particularly difficult for Fed Chairman Ben S. Bernanke and his colleagues, because much of the pickup in inflation is driven by energy prices, “an economic force over which the Fed has very little control.”

On the other hand, “there is a big payoff to the Fed in getting it right this time around,” she said. “Successful policy under these difficult circumstances could earn the Bernanke Fed invaluable inflation fighting credibility.”

Peter Morici, business professor at the University of Maryland, said the jobs report shows a combination of higher interest rates, high energy prices and a flagging housing market has slowed the economy even more than the Fed anticipated.

“The economy is adding too few jobs, and unemployment is likely to continue rising,” he said. “Stagflation has arrived.”

Yesterday’s rise in unemployment sent the so-called misery index — which adds the 4.3 percent inflation rate to the 4.8 percent unemployment rate — over 9 percent for the first time in years, mostly as a result of an energy-induced surge in inflation rather than rising unemployment. The misery index is used by political analysts to gauge the fortunes of incumbents.

“This could be yet another bad omen for the GOP Congress in November,” said Lawrence Kudlow of Kudlow & Co., a Republican economic adviser. “You do not want to go into an election with a rising misery index.”

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