Jobless rate dips to 5.2% Fed-watchers foresee higher interest rates as labor costs creep up


WASHINGTON -- The U.S. unemployment rate fell to 5.2 percent in March, its lowest level in five months, even as the economy added jobs at a slower-than-expected pace, the government reported yesterday.

At the same time, last month's gain of 175,000 jobs -- down from an increase of 293,000 in February -- was accompanied by an acceleration in labor costs and record factory overtime pay, suggesting the inflation rate could be on the rise.

"Inflation is not down the road; inflation is right here," said Anthony Chan, chief economist at Banc One in Columbus, Ohio.

"The numbers that the Fed pays attention to were all on the strong side," added David Jones, chief economist at Aubrey G. Lanston & Co. in New York.

That means the U.S. central bank is likely to continue raising the overnight bank lending rate, analysts said. "The Fed will tighten at the next meeting" on May 20, said Nick Perna, chief economist at Fleet Financial Group in Hartford, Conn., and may eventually boost the rate as high as 6.25 percent from the current 5.5 percent.

The number of people holding jobs, 129.2 million vs. 128.4 million in February, underscores the strength in labor markets, he said.

While March's employment gain fell short of analysts' forecasts of an increase of 202,000, workers' average hourly earnings rose 0.4 percent last month -- or 5 cents -- after being revised up to a 0.4 percent gain in February. That puts wage growth up 4 percent for the last 12 months, above the inflation rate and the highest this decade, analysts said.

In addition, factory overtime rose to a record 4.9 hours from 4.7 hours in February.

The benchmark 30-year Treasury bond fell 5/8 point, pushing up the yield 5 basis points to 7.12 percent -- the highest level since last September. Adding to bond traders' worries: The Economic Cycle Research Institute index of future inflation surged in March to the highest level since November 1995. The ECRI index is monitored by the Fed.

Stocks fell on inflation concerns when the markets opened, with the Dow Jones industrial average dropping 73 points. Stocks reversed course on expectations of higher earnings and rallied their biggest gains in four weeks. The Dow finished the day up 48.72 points to close at 6,526.07.

Still, average weekly earnings increased just 53 cents to $422.82 in March from $422.29 during February.

Moreover, Fed Vice Chairman Alice Rivlin said yesterday that Fed policy-makers should strive to keep employment high and should be wary of calls to reduce inflation to zero.

The Fed should strive to "keep labor markets at least as tight as they are now," Rivlin told members of the Eastern Economic Association in Arlington, Va. "The benefits of tight labor markets are enormous" in terms of building skill levels and encouraging employers and workers, Rivlin said.

President Clinton said the unemployment rate can fall below 5 percent without triggering inflation. "I now think we have persuaded most economists we could have unemployment 5 percent or lower without inflation," he told the Women's Economic Summit.

For the first three months of 1997, monthly job growth averaged 242,000, higher than last year's monthly average of about 215,000 new jobs. The February employment gain was initially estimated at 339,000.

By industry, service-producing employment rose by 187,000 in March, led by temporary help agencies and the computer industry. Manufacturing employment increased by 16,000.

Construction employment, however, fell by 27,000, after a big gain in February when unusually warm weather led to an early start for many construction projects.

Pub Date: 4/05/97

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