Signs of Some Slowing
Subject Economic policy
Topic Employment, Unemployment, and Inflation
Key Words Recession, Soft Landing, Productivity, Unemployment, Interest Rates
News Story

The U.S. Department of Labor's labor market data for the month of December provided evidence that the economy had indeed slowed. Employment growth was only 49,000 compared with the 200,000 to 300,000 new jobs created this spring. Although the unemployment rate remained unchanged, hours worked continued to decrease. The Labor Department's report caused a significant drop in stock prices.

The decrease in employment growth was greater than economists had anticipated. At least one major investment firm, Goldman Sachs Group, Inc., believes that the labor market data coupled with a significant drop in auto sales and a decline in retail sales indicates that the economy probably stopped growing in December. They informed their clients that they expect the economy to contract slightly in the coming quarter.

The unemployment rate tends to lag other economic indicators and therefore does not reflect the sharp decline in the economy in the last two months. Major corporations had announced 133,000 layoffs in December that are not reflected in the December unemployment rate. Economists now believe that the unemployment rate will rise next month and reach 4.5 to 5.0 percent by year-end.

The increase in average hourly earnings of non-supervisory workers brought the yearly rise to 4.2 percent. The increase in health care costs, however, is expected to bring total compensation cost increases to 6 percent or more by next year. In the past few years, firms were able to offset these increased costs with increases in productivity. When the economy slows, productivity increases are difficult and increased costs result in reduced profits.

There were some bright spots in an otherwise gloomy report. Health-care and the social service sectors continued to grow at a substantial pace. Trucking and transportation also grew, while state and local government added 65,000 new jobs.

(Updated February 1, 2001)

1. The article reports that the December Department of Labor report caused stock market prices to decline sharply. What in the report was of concern to investors? Why were they concerned?
2. Some economists were concerned that inflationary pressures were increasing. What is the role of productivity increases in offsetting rising labor costs? Why are productivity increases more problematic when the economy declines?
3. In the past year, firms were having difficulty finding new employees. In the event of a slowdown do you think these firms will layoff these workers? Why or why not?
Source Steven Pearlstein, "Jobs Data Reflect Slowing Economy," The Washington Post, January 6, 2001.

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