By Jonathan House and Eric Morath
The U.S. economic expansion is entering its sixth year with a
shiny exterior after the best stretch of job growth in almost a
decade. But under the hood, the recovery's engine continues to
sputter.
Overall job growth in June, when employers added 288,000 jobs,
showed businesses gaining confidence and shedding the caution that
has defined the labor market in the five years since the recession
ended. The nation's jobless rate fell to 6.1%, the lowest level
since September 2008, the Labor Department said Thursday, pushing
the rate closer to what many economists consider full
employment.
Yet those gauges of the labor market don't capture other
weaknesses in the employment spectrum. Nor do they explain the
mysteries of an economy that has been struggling to gain enough
velocity to shake off its many ailments long after the recession
ended.
Overall economic growth in the second quarter of the year may
not prove robust enough to offset the first quarter's
weather-induced 2.9% annualized rate of contraction. Consumer
spending remains weak, a consequence of a labor market delivering
new jobs but skimpy wage growth. And the share of Americans working
or looking for work--the so-called labor-force participation
rate--still hovers near its lowest levels since the late 1970s,
despite steady hiring.
PMW Technologies Inc., a supplier of human-resources software
called PeopleMatter, highlights the divide in the economy. The
Charleston, S.C., firm has added 50 higher-paid software engineers
and salespeople over the past year, boosting the company's benefits
package to attract and retain high-skilled workers. It plans to add
100 positions over the next year, bringing its total headcount to
250.
Yet the company is witnessing the choppiness among its clients
in the retail and food-services sectors. "The economy's very
fragile," said Chief Executive Nate DaPore. "We're in a
muddle-through economy."
Against this mixed backdrop, many investors are focusing on the
positive signs and staying bullish about what's over the horizon.
The optimism helped propel the Dow Jones Industrial Average above
17000 for the first time on Thursday.
The nature of the latest labor-market gains presents a challenge
for Federal Reserve officials: Improvement in top-line metrics such
as unemployment and inflation, both of which are nearing the
central bank's targets, is spurring speculation about
earlier-than-expected rate increases even though key gauges under
the surface show the recovery remains soft.
Capital Economics' chief U.S. economist, Paul Ashworth, wrote
Thursday that the strong job growth figures are among "the key
reasons why we think the Fed will be persuaded to begin raising
interest rates earlier than most expect." He forecast the first
rate hike in March.
But other data show the broader economy is still struggling to
rebound from an unusually sharp decline in the first three months
of the year. Harsh weather and a drawdown of business inventories
contributed to the fastest decline in economic output in five
years, a contraction at an annualized 2.9% pace.
Hopes for a big second-quarter rebound are now too beginning to
wither, too. Forecasting firm Macroeconomic Advisers on Thursday
lowered its estimate of second-quarter growth by 0.6 percentage
point to an annualized 2.7% after new trade data showed stronger
imports than expected, subtracting from domestic output. J.P.
Morgan Chase pulled its estimate down to a 2.5% pace from 3%.
Other economists' second-quarter forecasts are running only
slightly ahead of the 2.4% pace averaged from mid-2009, when the
recession ended, through the end of last year.
While import growth hints at underlying domestic demand,
separate Commerce Department data showed household spending in May
rose a lackluster 0.2%. When adjusted for inflation, which is
beginning to accelerate, spending actually declined for the
month.
Americans are facing higher prices this year for food and
energy, including gasoline. Higher costs for those staples can
limit discretionary spending at restaurants, malls and online.
U.S. workers' earnings have been climbing about 2%
annually--just enough to cover inflation--and show few signs of
breaking out of that range as an abundance of idled labor allows
firms to keep wages contained. "Slack in the labor market...is
dwindling, but we're not seeing that on the wage side yet," said
Alan MacEachin, an economist at Navy Federal Credit Union.
Fed officials must weigh that slack against an unemployment rate
falling faster than they projected. Last month, Fed policy makers
projected the U.S. jobless rate would be a little higher than 6% at
the end of 2014, basically where it stands after Thursday's
report.
Also flashing on the Fed's dashboard: The number of people
working part-time because they can't find full-time work rose and
the share of population either working or looking for work remains
around 30-year lows. June's labor-force participation rate was
62.8%, unchanged from the prior month.
The central bank wants to see a sustained labor-market recovery
before raising interest rates from near zero. St. Louis Fed
President James Bullard said late last month that the Fed may need
to lift rates earlier in 2015. If the economy continues to improve,
"I predict the conversation about monetary policy will change," he
said.
The jury is still out on whether an improving job market is
leading shoppers to spend more. Wal-Mart Stores Inc. Chief
Executive Doug McMillon told analysts during a meeting this past
week that the discount retailer wasn't seeing much of a difference
compared with 90 or 180 days ago.
That diverged from remarks made by Kroger Co. in June that its
customers are "exhibiting less cautious spending behavior,"
according to CEO Rodney McMullen. "More customers perceive the
economy to be in recovery, " as shoppers spend more on things like
premium pet food and organic products, he said.
Likewise, Molson Coors Brewing Co. CEO Peter Swinburn told
investors recently that the past five years were challenging for
its core drinkers in North America but that the company is now
starting to see the "green shoots" of recovery.
The divergent views may have to do with the circumstances facing
different customer segments. The low-income core that makes up
Wal-Mart's base are still dealing with job losses and cuts to
government benefits and are recovering slower than wealthier
shoppers who have benefited from rising home and stock prices,
William Blair analyst Mark Miller said.
Another factor restraining consumer spending is likely that much
of the new hiring is concentrated in low-wage fields. The retail
industry added over 40,000 workers last month and hospitality
businesses payrolls rose by 39,000.
Higher-paying sectors lagged behind. Manufacturing added 16,000
new jobs and construction added 6,000. The public sector was an
exception. Government employment grew by 26,000 last month and is
up by 54,000 so far this year, following a five-year
downsizing.
Wayne Slack of Chandler, Ariz., is one job seeker who is holding
out for a better position. After losing a supervisory role in
aerospace manufacturing, he's been unwilling to accept a
lower-paying position. Instead, the 47-year-old enrolled in
community college after being told his computer skills were
lacking. "I'm willing to go backwards a tad, but I'm not willing to
take an $8 pay cut to stand in front of a machine again," he
said.
Shelly Banjo and Michael S. Derby contributed to this
article.