- The Washington Times - Friday, July 7, 2006

Wage gains jumped to a five-year high of 3.9 percent as employers added another 121,000 jobs last month, the Labor Department reported yesterday.

The tepid growth in jobs, mostly in service professions such as health care, education and government, along with a steady unemployment rate of 4.6 percent, suggested economic growth is slowing under the weight of near-record fuel costs, a housing slowdown and sharply higher interest rates engineered by the Federal Reserve.

The report showed that from April to June, job growth slowed to 108,000 a month on average from 176,000 a month in the first quarter.

While the Fed would welcome such moderating growth, economists said the 0.5 percent jump in average hourly wages to $16.70 stoked inflation worries and might prevent the central bank from pausing its two-year campaign of raising interest rates to forestall inflation, economists said.

“The worst of both worlds” said Nigel Gault, economist at Global Insight, of the combination of faster wage growth and a softening job market. The wage gain of 3.9 percent in the last year was the best since June 2001.

Some economists thought the wage growth meant workers are gaining some bargaining power in negotiating bigger paychecks. Others, however, thought it might be the result of a better mix of jobs, as employers shed low-paying retail positions and added high-paying factory and office jobs.

The stock market fell with fear the big wage gains might prompt the Fed to raise rates further this year. The Dow Jones Industrial Average lost 134 points. But bond prices rose on hope that the Fed will focus on the weaker-than-expected job gains and decide to put off raising rates for a while.

The strong wage gains combined with a 0.4 percent increase in hours worked suggests economic growth remains healthy, said Roger M. Kubarych, economist at HVB Group. That “strengthens the case of Fed officials who see serious inflation dangers and support further tightening of monetary policy.”

Patrick Fearon, a senior economist at A.G. Edwards, agreed that concern about an uptick in wage inflation may tempt the Fed to raise rates despite the weak job growth.

The Fed has already raised interest rates 17 times, lifting mortgage rates to the highest levels in four years. The average rate on home equity lines of credit, at 8.2 percent, last week hit the highest level in five years and is up from 6.38 percent a year ago, according to Bankrate.com. The Fed next meets to decide on raising rates on Aug. 8.

The jobs report “suggests that the economy is cooling off a little bit, or cooled off a little bit in the second quarter, but it’s not crashing,” said Carl Tannenbaum, chief U.S. economist at ABN Amro. “If you take everything together, this doesn’t move the Fed dramatically one way or another as it prepares for August.”

President Bush cheered the latest snapshot on the job market in the world’s largest economy, calling it “good news.”

Despite the strong wages gains, consumers have been barely able to keep up with the soaring cost of fuel, health care and other necessities. Yesterday, premium crude prices hit another record of $75.78 in New York trading, driving up gasoline prices, which are once again approaching the $3-a-gallon threshold.

Consumers for the most part are forking over whatever it costs to fill their tanks with gas, but the high fuel prices have been prompting them to cut back in other areas such as eating out and entertainment. That is why economists expect them to help keep a lid on growth in the months ahead.

This article is based in part on wire service reports.

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