- The Washington Times - Friday, June 1, 2007

The economy last month recovered further from its flirtation with recession in the first quarter, with pickups seen in job growth, consumer sentiment and manufacturing, reports showed yesterday.

Consumers reprised the important role they have played in keeping the economy afloat this year amid setbacks in housing, autos and other areas. The secret to their success has been the solid job market, which continued to expand despite the winter pause in economic growth.

Job gains accelerated last month to 157,000 from 80,000 in April, with hiring especially strong in services such as education, health, hospitality, office and professional jobs, the Labor Department reported. The unemployment rate stayed at 4.5 percent and wage growth maintained its 3.8 percent pace over the past year.

The reassuring signs of growth sent stock indexes to new highs yesterday, with the Dow Jones Industrial Average rising 40 points to 13,688.

“These are all good numbers and point to a reasonably healthy economy — even with the housing slump.” said Lawrence Kudlow of Kudlow & Co. “Not too hot, not too cold. Did somebody say Goldilocks?”

Weakness persisted in manufacturing employment last month, despite an acceleration in industrial activity reported by the Institute for Supply Management, with another 19,000 jobs eliminated. Construction, the sector hit hardest by the housing recession, saw no employment gains during the height of the spring construction season.

But the job growth was strong enough to bolster consumer spirits, and they not only thumbed their noses at fast-rising gasoline prices that reached a record $3.23 a gallon last week, but also went on a spending spree despite a rare decline in income during April, the Commerce Department reported. That meant shoppers had to go deeper into debt and dip into their savings to maintain spending, thus driving personal savings back to its record low of -1.3 percent.

“Consumer spending hasn’t faltered and it’s a very strong labor market,” said Mark Vitner, an economist at Wachovia Corp. “The economy appears to be gaining momentum.”

Michael Alter, president of SurePayroll, a small-business pay-processing firm, said hiring at small companies is running at a torrid 4.8 percent pace so far this year, after declining 0.2 percent last year. Salaries are up by 2.7 percent to $32,142 on average.

“Small businesses are hiring, so the economy must be doing reasonably well,” he said, despite the “unimpressive” economic growth rate of 0.6 percent posted in the first quarter.

Many small businesses are scrambling to hire skilled and experienced workers as the labor market gets increasingly tight, and they have had to raise salaries and add benefits to attract them, he said.

“There’s a growing labor shortage issue in the country. Talented workers are getting tougher and tougher to find,” he said.

The scarcity of good workers is putting pressure on wages and stoking the Federal Reserve’s worries about inflation, he said, but stiff competition continues to keep businesses from automatically passing on their higher costs to customers through price increases.

A key price measure watched by the Fed showed that the core rate of inflation, excluding food and energy prices, fell back to 2 percent in April — putting it back within the Fed’s “comfort zone” between 1 percent and 2 percent for the first time this year.

“Moderate wage and labor productivity growth should help keep core inflation in check,” said Peter Morici, business professor at the University of Maryland, “but rising gasoline prices and pressure from the ethanol program on grain and food prices could yet ignite a wage-price spiral. The Federal Reserve will remain cautious about inflation.”

Economic growth is likely to rise to a little above 2 percent in the second quarter — hardly a “stellar performance,” Mr. Morici said, but inflation pressures leave the Fed “in no position to lower interest rates” to boost growth.

Thomas J. Duesterberg, president of the Manufacturers Alliance/MAPI, said prices for raw materials like energy and metals have been moderating even with the mid-year rebound in growth at manufacturing firms.

“Growth is being spurred by strength in high-technology goods, mining and material handling equipment, aerospace products and capital goods for new plants,” he said. Also, “exports to rapidly expanding markets around the world are helping U.S. production,” while at home “inventory rebuilding should help economic growth in the second half of 2007.”

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