South-Westerns' Economic News Summaries
February Job Growth Strong
Topic Employment, Unemployment and Inflation
Key Words

Job Growth and Inflation

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Reference ID: A143266052
News Story

With the American economy adding 243,000 jobs in February, some economists worry about possible inflation, which often accompanies rising employment rates. February's robust job creation was the largest since employment rebounded as the gulf coast sought to recover from Hurricanes Katrina and Rita.

The higher employment rates might relate to the exceptionally mild winter weather that the U.S. as a whole experienced in January and February--perhaps that has spurred job growth. Analysts who hold with this explanation say that employer's demand for workers is unlikely to remain as strong in the coming months. The good weather ended in February, but it still contributed to an additional 41,000 jobs in February-January contributed 55,000 construction jobs because of the good weather.

"This report is good, but it does not say the economy is booming," said senor economic advisor David Kelly at Putnam Investments, a Boston-based mutual fund management firm. Other analysts point out that if employment figures continue to boom, inflation is likely to make another unwelcome appearance again-and the Fed will respond quickly with appropriate monetary policy.

"This is what a healthy job market looks like - we just haven't seen it for a long while, so it makes inflation hawks nervous," said Jared Bernstein, an economist at the Economic Policy Institute in Washington. Along with the employment increase, the average hourly wage for American workers is rising. Excluding management positions, average hourly wages increased by 5 cents in February, to $16.47--an increase of 3.5 percent over the past year.

"It shows the economy is on a solid upward trend," said Lynn Reaser, chief economist at Bank of America's Investment Strategies group. "Businesses are becoming more confident in their willingness to hire workers and it also suggests that job growth will continue to support moderate growth in consumer spending."

With this emerging economic picture, some economists warn that the Fed may continue its recent incremental interest rate increases. "The big problem now is: What does the Fed do with this," said Argus Research's chief economist Richard Yamarone. "How does the Fed take the foot off the brake when you have stellar job creation and signs of increasing inflation?"

Consumer price inflation runs around 4 percent per year currently; such a rate would seem to easily offset the wage gains of only 3.5 percent per year. However, Mr. Bernstein at the Economic Policy Institute argues that wages are not pushing other prices upward. Core inflation - which excludes the volatile components of energy and food--has not crept up in tandem with wages. Instead, core inflation has remained stable at about 2 percent a year since the end of 2004. Correspondingly, Putnam's Mr. Kelly said, "I don't think the economy is superstrong here, and I don't think the Federal Reserve should be raising interest rates any further. "

Questions
1.

Discuss the difference between the overall inflation rate and the "core" inflation rate mentioned in the article. Why would the government differentiate between the two rates? What are the current implications of the differentiation?

2. Use supply and demand to explain why wages increased as employer demand for labor increased.
Source Eduardo Porter and Vikas Bajaj, "U.S. Says Employers Added 243,000 Jobs in February", The New York Times Online, March 11, 2006.
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