South-Western College Publishing - Economics  
Some Dark Clouds In the Forecast?
Subject Employment rate and economic growth
Topic Employment, Unemployment, and Inflation
Key Words Employment, Unemployment, Economic Growth, Wages, Interest Rates
News Story

The long-awaited turnaround in the economy may have started last month. The Bureau of Labor Statistics reported that job growth came to a halt in September -the economy actually lost 8,000 jobs compared with a growth of 654,000 new jobs for the months of June and July. Another indication of a slowdown was the decrease in the size of the work force; the first time that has happened since January 1996. The unemployment rate based upon the household survey remained unchanged at 4.2 percent while, average hourly wages rose by 7 cents-the biggest one-month increase in more than a decade. While many economists have forecast the economy to slow, the September employment report is the first evidence that the slowdown may have started.

In the past few months, the economy has experienced rising interest rates, sharply increased oil prices, hurricane Floyd and a declining stock market. Hurricane Floyd disrupted commerce on the East Coast and discouraged East Coast firms from hiring. Employment growth was weak even in industries not immediately affected by the hurricane. Rising interest rates were a factor in the drop in the number of households refinancing mortgages.

Although the September increase in average hourly earnings for non-supervisory employees was very large, wage growth over the past 12 months has been 3.8 percent, which is considered to be within the non-inflationary range. As long as productivity continues at its current rate, the added revenues stemming from increased output can pay for the increased wages while maintaining prices.

(Updated November 1, 1999)

Questions
1. Using aggregate demand/aggregate supply diagrams, show the impact on real GDP and the price level of:
  a. an increase in interest rates.
  b. an increase in oil prices
2. Why did the Federal Reserve raise interest rates in the past few months?
3. Although the increase in average hourly earnings for the month of September was very large, economists do not seem to be very concerned about inflation. What arguments do they offer in support of their belief? Explain.
Source Louis Uchitelle, "Job Growth Falters in Possible Sign That Economy Is Starting to Slow," The New York Times, October 9, 1999.

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