The latest data show employment and manufacturing growing at a
vigorous rate, suggesting the U.S. economy is regaining momentum after a slow
start to 2007. The renewed strength, however, could raise inflation concerns for
the Federal Reserve.
Nonfarm employers added 157,000 jobs to their payrolls in May,
nearly double the 80,000 new jobs recorded in April, the Labor Department said
Friday. Led by the service sector, the rebound brought the three-month average
job gain to about 137,000, a pace strong enough to keep unemployment low and
wages rising. The unemployment rate held steady at 4.5%.
Meanwhile, the Institute for Supply Management, a purchasing
managers' trade group, reported that its index of manufacturing activity came in
at 55 in May, up from 54.7 in April, indicative of expanded factory production.
That is a stark contrast to earlier this year, when manufacturing activity was
contracting.
Economists saw the reports as confirmation that the economy is
regaining momentum despite the pain that high gasoline prices and the housing
slump are inflicting on the consumer. Gasoline prices rose throughout April and
hit a peak of more than $3.25 a gallon in mid-May.
"I think we're on the path to recovery after a really bad first
quarter," said Stephen Stanley, chief economist at RBS Greenwich Capital in
Greenwich, Conn. "But it's going to be somewhat slow because of the spike in
gasoline prices and the effect that's going to have on consumer spending."
So far, spending appears to be holding up. In a separate
report, the Commerce Department reported that personal consumption expenditures
of American households rose 0.5% in April, below the average 0.6% rate of the
previous three months but still higher than expectations. Personal income,
meanwhile, declined 0.1% in April -- largely reflecting the Commerce
Department's accounting for bonus payments, which had boosted its estimates of
personal income in the previous three months. Consumers kept spending beyond
their immediate means: In April, their outlays exceeded their disposable incomes
by 1.3%.
Economists polled by The Wall Street Journal expect real gross
domestic product -- a broad measure of economic activity, adjusted for inflation
-- to grow 2.0% in 2007, down from 3.3% in 2006. The Commerce Department
reported earlier this past week that real GDP grew at an annualized rate of only
0.6% in the first quarter, the slowest pace since 2002.
The economy's performance so far falls largely within the game
plan of the Federal Reserve. Policy makers had been hoping that a slowdown would
help cool inflation, which had been running well above the 1% to 2% range in
which the Fed would like to keep it in the long run. Friday, the Commerce
Department reported that its index of consumer prices excluding food and energy,
the Fed's preferred measure, rose 0.1% in April and was up 2.0% from a year ago.
That is an improvement from February, when the price index was rising at a
year-on-year rate of 2.4%.
As the economy rebounds, though, the added activity could
reignite inflation, increasing the odds that the Fed will have to hit the brakes
by raising its short-term interest-rate target from the current 5.25%, where it
has stood since June of last year. Fed officials see "considerable uncertainty"
surrounding inflation, according to minutes from their most recent policy-making
meeting in early May.
Among the biggest concerns is that companies' ability to get
more output from each hour worked could be waning, a situation that tends to
inflate wages and prices as companies extend shifts and seek to hire more
workers in their efforts to expand. Friday, the Labor Department reported that
the average workweek increased by 0.1 hour to 33.9 hours in May, the approximate
equivalent of a 300,000-job increase in payrolls. The average hourly wage was up
3.8% from a year earlier.
"I think we're in a world where if growth picks up, inflation
will ultimately be more of a risk because productivity gains are slowing and
because labor supply is sluggish," said Bruce Kasman, head of economic research
at J.P. Morgan Chase & Co. in New York.
Service-providing sectors such as health care, hospitality and
professional services led the May growth in payrolls, while the closely watched
construction sector was flat. Steve Pogorzelski, group president of
online-recruitment and job-search company Monster Worldwide, said competition
among employers is intensifying for people with skills in high-demand areas such
as nursing, accounting and information technology. "It's an environment where
people with hard-to-find skills have the ability to go across the street or
across town for more money," he said.
How quickly the economy rebounds will depend to a large extent
on how U.S. consumers, whose purchases make up more than two-thirds of all
economic activity, respond to the conflicting influences of high gasoline
prices, falling house prices, a robust stock market and rising incomes. Friday,
the latest reading on the University of Michigan's consumer sentiment index
suggested they were still in relatively good spirits: The index rose to 88.3 in
May from 87.1 in April.
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