Job Growth Disappoints; Wages Rise

WASHINGTON — The nation’s payrolls grew by a surprisingly weak 121,000 positions in June while wages rose at their fastest annual pace in five years, the Labor Department reported Friday, renewing fears of a one-two punch of slowing economic growth and rising inflation.

Most analysts had predicted a net gain of 175,000 jobs in June, and some even ratcheted up estimates this week. Instead, businesses reacted to a cooling housing market and rising oil prices by cutting workers in the construction, retail and insurance sectors.

Although employers are hiring fewer people, they appear to be paying more. Friday’s report showed that wages rose more than expected last month, with average hourly earnings up 3.9% in the last year, the fastest annual growth since June 2001.

That’s good news for workers who have been coping with stagnant wage growth as productivity increased consistently during the economic recovery. But it may be bad news for the Federal Reserve, which fears rising inflation.

Worries about slowing growth and rising inflation -- often called “stagflation” -- helped spark a broad decline in stock market indexes. The Dow Jones industrial average fell 134.63 points, or 1.2%, to 11,090.67.

Bond yields, however, fell as traders reasoned that weak job growth could give the Fed more leeway to possibly pause from raising rates at its next policy-making meeting Aug. 8.

In an effort to curb inflation and control growth, the Fed has raised rates 17 times since 2004. After its last meeting June 29, the central bank and its new chairman, Ben S. Bernanke, suggested that growth may have slowed enough to allow them to stop raising rates.

A rate increase now could bump up mortgage rates enough to prompt homeowners to drastically cut spending, save more and tip the economy into recession, said University of Maryland economist Peter Morici, former chief economist at the U.S. International Trade Commission.

“The Fed could easily push the economy off of the cliff,” Morici said.

The last two recessions, in 1990-91 and 2001, followed repeated rate increases. Some analysts predict Bernanke will hold off on further hikes, convinced by the jobs report that growth is slowing and wages are catching up to rising productivity.

Although the risk of recession is less than 20%, it jumps to 40% if the Fed raises rates next month, said Bernard Baumohl, executive director of Economic Outlook Group in New Jersey.

“He knows it takes time for inflation to slow down but it will slow down as the economy slows,” Baumohl said. “The one thing you don’t want to do is to over-tighten.”

But Bernanke, who is still trying to make his own mark since replacing longtime Chairman Alan Greenspan this year, has styled himself as an inflation fighter.

“Bernanke is worried about establishing his credibility,” said Morici, who predicted a quarter-point rate increase to 5.5% in the Fed’s benchmark short-term rate next month.

President Bush highlighted the jobs report during a Friday news conference in Chicago, calling job gains a sign of increased economic prosperity brought about by tax cuts.

“In the first quarter, our economy grew at 5.6%. Productivity is high. People are better off, things are working,” Bush said.

Democrats saw Friday’s report as more evidence of the country’s economic woes.

“President Bush and congressional Republicans are crowing about the economy even while it continues in the wrong direction for most American families,” House Minority Leader Nancy Pelosi (D-San Francisco) said Friday.

“The president just doesn’t get it,” Pelosi said. “Many Americans are living paycheck to paycheck and families are struggling to make ends meet -- as gas prices and healthcare costs are doubling, oil prices remain at record level, and real family income has stalled.”

Annual economic growth of about 3% is expected in a recovery. Although the economy expanded at a quick 5.6% clip during the first quarter, most analysts predicted a slowdown later this year to growth of 2% to 3%.

“The further the Fed has to raise interest rates, the greater the slowdown might turn out to be,” said Nigel Gault, U.S. economist for consulting firm Global Insight in Waltham, Mass. Gault predicts the economy will grow by 2.75% for the rest of the year.

The economy added 92,000 jobs in May and 112,000 in April, the Labor Department said, 3,000 more than previously reported. For each of the last three months, analysts expected more new jobs than were actually produced. Job gains of about 150,000 a month are needed to keep up with growth in the labor force, analysts say.

Gault pointed to some bright spots in the jobs report, including the manufacturing sector, which added 15,000 jobs, reversing a May loss of 8,000, an indication that business spending is up.

Other bellwether industries saw setbacks last month, including construction, which lost 6,800 jobs during the last two months, the first back-to-back loss in five years. Gault expects construction hiring to fall even further this year as the housing market contracts.

High energy prices continued to take a toll on the retail sector, which shed 7,000 jobs in June after losing 27,000 in May and 43,500 in April.

The unemployment rate was unchanged for June at 4.6%, the lowest since mid-2001. The unemployment rate for whites remained 4.1%, while the rate for African Americans rose slightly to 9% from 8.9%, and the Latino rate jumped to 5.3% from 5%.

Long-term unemployment -- defined as joblessness for at least six months -- fell by 2.6 percentage points in June to 16.2%, well below the 20% seen in 2004 and 2003. But economists say the improvement may not be sustainable. A similar drop in January was reversed a month later.

Workers’ average hourly earnings rose to $16.70 in June, up 0.5% from May and exceeding economists’ forecasts of a 0.3% gain.