South-Western College Publishing - Economics  
May's Labor Data Means?
Subject Economic slowdown
Topic Monetary Policy
Key Words Economic Growth, Inflation, Unemployment
News Story

Economic data is being carefully monitored for signs that the Federal Reserve's six interest rate hikes over the last year have slowed the economy. Early signs of a slowdown were reports that car and home sales have dipped, construction spending is off and manufacturing output decreased. Given the volatile nature of these statistical series, these reports were not very convincing. May's labor market data, on the other hand, provides strong evidence of an economic slowdown. The nation's unemployment rate rose to 4.1 percent from 3.9 percent in April. Over 116,000 jobs were lost -- the largest monthly drop in over 8 years.

Analysts had expected a seventh rate hike in late June at the Fed's next meeting. The clear evidence of a slowdown that is represented in May's labor market report caused investors to push up stock prices in the belief that further rate hikes will not be needed. However, the increase in stock prices generated considerable wealth and the irony of this situation is that the very data that analysts thought would preclude a rate hike, may actually cause one to occur.

Some analysts believe that the May employment data overstate the amount of job loss. They argue that the temporary employment of census workers in May is the cause of the distortion. If the census employees, they argue, would have taken private sector jobs, employment figures would have increased rather than decreased. Others counter that the employment losses were so widespread as to argue for a slowdown.

The May report contained data on another concern of policy makers - wage inflation. Average hourly earnings rose only a cent, the smallest increase in months. Wage increases are now averaging 3.5 percent over the past 12 months, compared to 3.8 percent in April.

(Updated July 1, 2000)

Questions
1. Describe the "wealth effect." How would an increase in stock prices affect aggregate demand?
2. The Federal Reserve is attempting to slow the economy with a series of interest rate hikes. How do increases in the interest rate slow the economy?
3. Why are policy makers concerned with the level of wage inflation? How do wage increases affect aggregate supply?
Source Louis Uchitelle, "May's Labor Data Indicate Economy Could Be Slowing," The New York Times, June 3, 2000.

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